The IRS and Treasury on June 17 published final regulations addressing the computation of discounted unpaid losses of insurance companies. The regulations implement changes made to Section 846 of the Internal Revenue Code by the 2017 tax reform act (the Act), and respond to public comments on proposed regulations that were issued in November. Additional guidance in the form of a revenue procedure is expected later this year.
The final regulations generally are consistent with the regulations proposed in November, and are responsive to public comments on what is arguably the most controversial issue in the proposed regulations, namely the maturity of the bonds that form the basis for determining the discount rate under Section 846, as amended.
A company’s decision about whether to use the forthcoming discount factors based on the final regulations or the discount factors prescribed in Rev. Proc. 2019-06, and its decision about whether to use the composite method, may be driven by both (1) modeling of discounted unpaid losses (and the resulting reserve transition adjustment) under the two sets of factors and (2) the administrative benefits, if any, of not undergoing an additional change in factors.
Insurers should continue to monitor the Internal Revenue Bulletin for further guidance in this area.
Finally, there may be accounting implications, for example, recognition of a change to the transition adjustment deferred tax value, or a separate deferred tax value should application of the final regulations and promised guidance lead to a tax accounting method change, for companies that initially relied on the discount factors in Rev. Proc. 2019-06, but instead choose to use new discount factors that are computed based on the final regulations.
Insurance Tax Leader, PwC US