"Statutory Loss Reserves are booked at their nominal (undiscounted value)"

JaarndtJaarndt
in Klann.ReinsComm

Hello, I saw this fact listed in the wiki for this section and it is causing a little bit of confusion to me. In the Taxation section from Odomirok we learned that to get undiscounted reserves we need to use schedule P, part 1 and back out the tabular discounts. To me it seems like if we have to back out tabular discounts then that means loss reserves are not booked at their nominal value and are instead booked net of tabular discounts. Can you please explain where I am going wrong with my interpretation of this statement?

Comments

  • grahamgraham

    We're looking into this...

  • grahamgraham

    Ok, we've looked into this and the Odomirok text is not totally clear on the subject of discounting.

    Short answer: Loss reserves MAY in certain circumstances be discounted when reported on the balance sheet. (I will amend the statement in the wiki based on the information in Odomirok as detailed below.)

    Longer answer:

    There was an exam problem that specifically addressed the question of discounting in SAP financial statements. The answer provided in the examiners' report stated explicitly that SAP does not allow discounting of loss reserves. Here is a link to that exam problem:

    This answer may be incorrect however. The Odomirok text addresses the issue of discounting in chapter 22:

    So this seems to be saying that discounting is "usually" not permitted. Anyway, Schedule P, Part 1 does indeed include columns (32 & 33) for nontabular discounting:

    • The case and IBNR reserves provided in Part 1 are net of tabular discounting and gross of non-tabular discounting, up until columns 32 and 33. The amount of non-tabular discount is shown separately for loss and LAE in columns 32 and 33, respectively.
    • Note that for the example financial statements for Fictitious in Appendix 1, the amounts shown in columns 32 and 33 are zero because the Company does not discount nontabular reserves.
  • JaarndtJaarndt

    Thank you so much for looking into this. It seems the CAS is very inconsistent on this topic. The above from Odomirok seems to even suggest that SAP allows non-tabular discounting but that was listed as a common error in the examiners report. Do you know if this section of Odomirok was updated since 2019? It also seems weird that one of the common mistakes was "not stating the extend of possible loss reserve discounting for SAP" but they then accepted an answer of "SAP does not allow discounting loss reserves."

  • grahamgraham

    The last update for the Odomirok text was 2019, but I believe they issue "errata" from time to time that is then incorporate into the next edition. The previous update was in 2014.

    Unfortunately It's just a fact of life that there are errors and inconsistencies in the examiners' reports and also in the source material. There doesn't appear to be any system in place to address this however. I have written to the exam committee in the past but that usually doesn't go anywhere.

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