Calculating the Tax-Basis Income - Terms
the equations for Tax-Basis EP & Tax-Basis Incurred Loss use the following terms (listed in the artical):
PL = Paid Loss (during year)
IL = Incurred Loss (during year)
L^D = Losses after Discounting
D = Discount amount (= difference between undiscounted and discounted losses = IL – LD)
I'm trying to understand in the equation the what the "chg" represents?
the first example give loss at 7,000
and the irs discount rate as 5%
chg(L^D) = 7000/(1.05)
so why isn't the chg(L^D) for CY+1 not
chg(L^D) = (0-7000)/(1.05^2)
since we need to discount back another year? (like the investment income getting another year of interest)
Comments
I think I just figured it out it's the change in the losses after discounting, so if the loss had been paid out in CY+2
then the chg(L^D) for CY+1 would be
(7000/(1.05^2)) - (7000/1.05)
and after reading a the next section L really stands for Loss Reserves not Loss as that would be reserves + paid amounts
Yes, what you say is essentially correct.
I came to the same conclusion as mec06e after spending some time scratching my head.. Please could the wiki be updated to say
L^D = Losses Loss Reserves after Discounting
Changed, thx!