SEC. 2. BACKGROUND

.01 Section 846 provides that discounted unpaid losses must be separately determined for each accident year of each line of business by applying an interest rate determined under § 846(c) and the appropriate loss payment pattern to the amount of unpaid losses as measured at the end of the tax year.

Section 846(d) directs the Secretary to use the most recent aggregate loss payment data of property and casualty insurance companies to determine and publish a loss payment pattern for each line of business every five years. This payment pattern is used to discount unpaid losses for the accident year ending with a determination year and for each of the four succeeding accident years.

Section 846(e) allows a taxpayer to make an election in each determination year to use its own historical payment pattern instead of the Secretary’s tables. This election does not apply to any international insurance or reinsurance line of business.

Section 846(f)(4) defines the term “line of business” as a category for the reporting of loss payment patterns on the annual statement for fire and casualty companies

approved by the National Association of Insurance Commissioners (NAIC), except that the multiple peril lines shall be treated as a single line of business. Section 846(f)(5) states that the term “multiple peril lines” means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery.

.02 Pursuant to § 846(d), the Secretary has determined a loss payment pattern for each property and casualty line of business for the 1997 determination year that, pursuant to § 846(d)(1), must be applied through the 2001 accident year. The loss payment patterns for the 1997 determination year are based on the aggregate industry loss payment experience as reported on the 1995 annual statements filed by property and casualty insurance companies and compiled by A.M. Best and Co.

.03 The loss payment patterns for the 1997 determination year are based on the aggregate loss payment information reported on the 1995 annual statements of property and casualty insurance companies. The tables are now arranged in alphabetical order. Following is an additional explanation of some of the tables.

(1) NAIC changes in lines of business. The NAIC has changed the reporting of unpaid loss experience on the annual statement for fire and casualty insurance companies. These changes are reflected in the lines of business set forth below.

(2) Treatment of Multiple Peril Lines. Section 846(f)(4) defines the term “line of business” and states that the multiple peril lines are to be treated as a single line of business. The term “multiple peril lines” means lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery. On the 1990 annual statement the multiple peril line was represented by the following three lines: Homeowners/Farmowners; Commercial Multiple Peril; and Special Liability (Ocean Marine, Aircraft (all Perils), Boiler and Machinery. On the 1995 annual statement, the multiple peril lines continue to be represented by the same three lines.

Revenue Procedure 92–47, 1992–2 C.B. 980, prescribed the loss payment

patterns and discount factors for the 1992 determination year. In that revenue procedure, the loss payment patterns that were used followed the changes made to the 1990 annual statement, including reporting the multiple peril lines as three separate lines of business. Subsequent revenue procedures did the same. See Rev. Proc. 93–29, 1993–2 C.B. 344, for the 1993 accident year; Rev. Proc. 94–47, 1994–2 C.B. 688, for the 1994 accident year; Rev. Proc. 95–40, 1995–2 C.B. 402, for the 1995 accident year; and Rev. Proc. 96–44, 1996–2 C.B. 330, for the 1996 accident year.

Because § 846(f)(4) requires that the multiple peril lines be treated as a single line of business, the lines of business that are shown on the 1995 annual statement as Homeowners/Farmowners; Commercial Multiple Peril; and Special Liability (Ocean Marine, Aircraft (all Perils), Boiler and Machinery) are merged in this revenue procedure as one multiple peril line of business. The merged line is entitled “Multiple Peril Lines (Homeowners/Farmowners Multiple Peril, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery)).”

(3) Factors to be used when tables indi- cate loss fully paid. In many situations, losses are deemed fully paid under the Secretary’s table prior to AY+14, and no discount factor is shown for AY+14 and earlier accident years. If taxpayers have unpaid losses relating to an accident year which is older than the last accident year for which a discount factor is presented in the Secretary’s table, those unpaid losses should be discounted using the discount factor for the last accident year in the Secretary’s table.