SECTION 6. CHANGE IN METHOD

OF ACCOUNTING

.01 In general. A change in an insurance company’s method of discounting unpaid losses and estimated salvage recoverable to a method described in section 3 is a change in method of accounting to which §§ 446 and 481 apply. An insurance company that wants to change its method of accounting to a method consistent with this revenue procedure must follow the automatic change in method of accounting provisions in Rev. Proc. 2002–9, 2002–3 I.R.B. 327 (as modified and amplified by Rev. Proc. 2002–19, 2002–13 I.R.B. 696, modified and clarified by Announcement 2002–17, 2002–8 I.R.B. 561, and amplified, clarified, and modified by Rev. Proc. 2002–54, 2002–35 I.R.B. 432) with the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply to an insurance company that wants to make the change for its first taxable year ending on or after December 4, 2002, provided the insurance company’s method of discounting unpaid losses addressed in this revenue procedure is not an issue under consideration for taxable years under examination, within the meaning of section 3.09 of

taxable year. The amount of estimated salvage recoverable is determined on a discounted basis in accordance with procedures established by the Secretary. See § 1.832– (4)(c) of the Income Tax Regulations.

.04 Section 846(a)(2) provides that the amount of discounted unpaid losses as of the end of any taxable year attributable to any taxable year is equal to the present value of the losses (as of such time) determined by using (1) the amount of the undiscounted unpaid losses as of such time; (2) the applicable interest rate; and (3) the applicable loss payment pattern.

.05 Section 846(d) instructs the Secretary to determine a loss payment pattern for insurance companies to use for each line of business by reference to the historical payment pattern applicable to such line of business. Section 846(d)(2) and (3) provide rules for the Secretary and insurance companies to use in determining the loss payment patterns. Each year, the Secretary publishes tables in the Internal Revenue Bulletin setting forth the loss payment patterns and discount factors for that accident year. See, e.g., Rev. Proc. 2001–60, 2001–2 C.B. 643. Alternatively, § 846(e) permits insurance companies to elect to use their own historical payment pattern for purposes of computing discounted unpaid losses.

.06 After Congress enacted § 846, the Treasury Department published Notice 88– 100, 1988–2 C.B. 439, to provide guidance with respect to several issues expected to be addressed in forthcoming regulations under § 846. Section V of Notice 88– 100 stated that regulations under § 846 would provide that taxpayers cannot use information not appearing on their NAIC annual statements to allocate aggregate unpaid losses among several accident years. Instead, the notice set forth a method for computing a composite discount factor by (i) determining the fraction of losses unpaid at year-end for each such accident year includible in the payment pattern for a given line of business, (ii) determining the discounted fraction of losses unpaid for each of these accident years, and (iii) dividing the sum of the fractions determined under (ii) by the sum of the fractions determined under (i). The notice provided an example to illustrate the operation of this formula.

.07 Sections 1.846–1, 1.846–2, and 1.846–3 of the regulations were promul

gated by T.D. 8433 (1992–2 C.B. 146) in 1992. These regulations provided guidance on several issues addressed in Notice 88–100. Accordingly, portions of Notice 88–100 were obsoleted in 1992 by the publication of T.D. 8433. Section V of Notice 88–100 was not, however, obsoleted.