
Hensler, Trends in Tort Litigation, The Story Behind the Statistics – SK
Detail Outline for Exam 7 – No Longer on Exam
 Hensler, Trends in Tort Litigation, The Story Behind the Statistics – SK
Introduction
The policy debate over tort reform
The statistical debate …
… on the litigation explosion
… on the growth in amount awarded
The worlds of tort litigation
Treating three worlds as one invites distortion
Key questions to be answered
Litigation: How Much is There?
The controversy
Data sources …
… and data problems
Total amount of tort litigation nationwide is growing slowly
But growth differs for different case types
High-stakes personal injury suits are growing faster
Where the explosion may occur
So how much tort litigation is there?
Jury Awards: Stable or Out of Control?
More statistical confusion
Which yardstick to use
Median awards – probably the best measure of a “typical” award.
Mean awards – extreme high/low values can distort this as a measure of “typical” award.
Expected awards = avg award * probability of winning.
ICJ jury verdict studies
Key issues studied
- kinds of cases tried and trends in outcomes
- how juries compensated various types of injuries and how it changed over time
- how jury verdicts are related to the characteristics of litigants
Data is specific to San Francisco and Cook County.
Overall, median awards haven’t changed much … - from 1960 to 1975, median stayed
about the same in both jurisdictions.
… but some recent changes are evident – in the 80’s, Cook County’s median dropped
slightly (possibly due to a change from contributory negligence to a comparative
negligence standard), but San Francisco rose dramatically (possibly due to the
establishment of mandatory arbitration for smaller-value case drove smaller-value cases
out of the courts). But if you break it up by line, auto medians are stable, while product
and med mal medians rose sharply.
Average awards have risen sharply – for all lines in both jurisdictions.
The chances of winning have increased – in both jurisdictions. In 60’s about ¼ won. In 70’s,
about 1/3 won. In 80’s, about ½ won. In San Francisco, there was actually a small decrease in
probability for product liability cases, but in 1980s they were still winning more than ½ .
Together w/ higher awards, this leads to higher expected awards.

Hensler, Trends in Tort Litigation, The Story Behind the Statistics – SK
Are juries “out of control”?
Jury awards might be changing because the cases are changing.
Awards might be changing because juries are better able to calculate proper
compensation/deterrents.
Jury trial system might be correcting these awards in posttrial processes.
If any of these are true, then juries are not “out of control”.
Explaining jury behavior …
… trying different kinds of cases – now juries are seeing more cases involving more
serious injuries and larger expenses.
… awarding more dollars for serious injuries – above increases due to larger cases,
juries are still awarding more money for serious injuries.
… responding differently to cases from different “worlds” of litigation – juries are
more likely to award money in product, med mal, or work injury, than they are for an
auto accident for an injury of the same degree of severity (premium effect). Juries also
tend to award more money if the defendant is an institution (deep-pocket effect).
It’s unknown whether juries respond differently to irrational sympathies or
prejudices against defendants.
What happens after trial?
The bottom line
Litigation Costs: How Much, to Whom?
Transactions costs – complaints and rebuttals
Where the dollars go
Effect of case complexity
Growth rate for transactions costs
In sum …
The Story Behind the Statistics
The emerging worlds of tort litigation
3 differences evident in the numbers:
1) Routine personal injury torts (auto) are growing slowly in frequency and
costs, and outcomes haven’t changed much over last 25 yrs.
2) Higher-stakes torts (malpractice, product liability) are growing faster in
frequency and costs and outcomes have increased dramatically over the past 25
yrs.
3) Mass latent injury torts, when identified, tend to explode in number, carry
high transaction costs, and have highly uncertain outcomes.
Table 5.1 summarizes the 3 evolving worlds of Tort Litigation:
Auto and Other Ordinary Lawsuits: high volume; stable law; routinized;
increasing ADR; modest stakes; little difference potential; slow growth in
frequency, outcomes, costs.
Product Liability, Med Mal, Business Torts: lower volume; evolving law;
increasingly specialized; heavy pretrial procedure; little ADR; large $ potential
per case; deterrence is factor; faster growth in frequency, outcomes, costs.
Mass Latent Injury Cases: concentrated in time and place; problematic law;
small, highly specialized bar; discovery critical; procedural innovation;
enormous $ stakes for parties; deterrence is key issue; highly uncertain in
number, outcome, and costs.

Hensler, Trends in Tort Litigation, The Story Behind the Statistics – SK
Routine personal injury torts
Higher-stakes personal injury torts
Mass latent injury torts – a special case of product liability torts. The latency of these injuries
make discovery prolonged and costly. Large numbers of these claims can overload courts,
leading to further delays. Future costs are highly uncertain.
What the tort evolution implies for policy
 Keeton, “The Impact on Insurance of Trends in Tort Law,” Issues in Insurance – SK (1984)
I. Introduction
II. Changes in Sources of Compensation for Accidental Losses
III. A Summary of Changes within the Basic Theories of Tort Liability
Negligence and Strict Liability
Negligence principle emerged in mid-19th century. Previously, strict liability seems to
have dominated.
Rylands v. Fletcher – English House of Lords – a landowner contracted with someone
to construct a reservoir. This flooded a neighbor’s land. Under strict liability, the
landowner was found liable. However, under negligence, he could have been found
vicariously liable for the contractor’s negligence.
The history continues – come back if more time….
Changes in the Practical Meaning of Negligence
Reducing the Areas on Nonliability for Negligence
Immunities – the idea that negligent person receives special protection.
Govt immunities – municipalities were not liable for negligence in the course of
their activities (operations of police force). Yet they were liable for negligence
of employees in scope of proprietary activities (municipal skating rink).
Charitable immunities – could be held liable for negligence in upper echelons of
management.
Family immunities
Some developments follow to cut down these immunities:
Charitable immunities – one argument was that if the charity had insurance they
waived its immunity. This idea was not held in most courts, since a charity
could only get full insurance or none. Second argument – the availability of
insurance waives the insurance. This makes more sense – as insurance is now
available, it would be wrong to expect a charitable hospital not to protect victims
of their own negligence.
Family immunities more resistant to liability insurance. This immunity is meant
to protect family harmony and discipline. Liability claims could cause sources
of friction in family. Or, two family members could collude to gain financial
gain for both.
Govt immunities – even less impacted by liability insurance.
No-Duty Rules
Statutes of Limitation

Keeton, “The Impact on Insurance of Trends in Tort Law,” Issues in Insurance – SK (1984)
Comparative Negligence
“last clear chance” doctrine: allows a negligent plaintiff to recover full damages
if the defendant had the “last clear chance” to avoid an accident.
contributory negligence places entire loss on plaintiff.
“pure” comparative negligence: recovery = %-age of “full” damages equal to %age of negligence attributed to the defendant.
“limited” comparative negligence: If a plaintiff is more negligent than the
defendant then plaintiff is barred from recovery. Variations include: “not-morenegligent” in which if plaintiff and defendant are equally negligent, plaintiff gets
50% recovery. “less-negligent” requires plaintiff to be 49% or less negligent to
receive a recovery.
Abrogation of Guest Statutes – default is that a driver of a car is subject to liability for
injuries to a passenger caused by the driver’s negligence. Some states (by judicial
decision) require proof of fault beyond ordinary negligence for a “guest” passenger (that
is a passenger not for hire or present for the benefit of the host).
In 1920s and 1930s, majority of the states enacted “guest statutes” declaring a
host driver would not be liable to a “guest” passenger for injuries caused by
ordinary negligence. Liability is however existent for “gross negligence”,
“recklessness” or “willful and wanton misconduct”.
Justifications for statutes: 1) to bar claims of an ungrateful guest against a
generous host; 2) to protect against collusion between a host and guest.
Consumer protection ideals grew in 1960s and 1970s, and states have begun
repealing these statutes, starting with CA Supreme Court who ruled them as
being unconstitutional as a violation of “equal protection” clauses.
Changes in Rules of Law Affecting Negligence Claims
Standards of Professional Duty
The Basic Standard – a negligent standard.
A practicing person must not only perform according to his duties, but
must also have the qualifications to do so. If a person performs well, but
does not qualify, he is still negligent.
1974 – Supreme Court of Washington found that a uniform custom in a
profession is not controlling. A person suffered eye damage because she
wasn’t diagnosed for glaucoma. The medical experts said it’s not routine
to test glaucoma for people under 40, but court found they should have.
Changes in Practical Meaning – there appears to be a trend of seeing less
strong negligent claims being heard in court. Though the standard is not
changing, the substance (level of tolerance) may change.
State of Knowledge – how much did the profession in itself know at the time of
treatment? This can change through time. Strict liability never applies in
practice.
Establishing the Standard of Care – the degree of care needs to be established
Proof of Violation – the loss needs to be proved.
res ipsa loquitur – the thing speaks for itself. If something is obvious, there is no
need to further prove the violation.

Keeton, “The Impact on Insurance of Trends in Tort Law,” Issues in Insurance – SK (1984)
Liability of Insurers for Conduct of Their Own Agents
Liability in Excess of Policy Limits
The company’s duty to defend the insured stems from the relationship between
them created by the insurance contract. Company can control defense and
settlement that affects its interests and the insureds’ interests. These interests
can sometimes come into conflict.
If a claim can settle for an amount not exceeding the limit of liability, the
insured’s best interest is to settle within the policy limit. The company’s best
interest is to reject settlement and try the case in hopes of winning and pay no
liability.
Other Liabilities of Insurers – the knowledge of insurance coverage in a case may
affect the attitudes and decisions of judges and juries. This could be a bias against
insurers. But there are three principles that can explain this.
1) Disallowing unconscionable advantage – where there is a disparity in
knowledge between parties. Usually, the P/H knows little about the contract in
comparison w/ the insurer’s representative. This principle disallows an insurer
to have such an advantage.
2) Honoring reasonable expectations of the applicants and intended
beneficiaries, even though there was painstaking study of policy provisions.
3) Detrimental reliance – a redress may be allowed to the claimant if he
justifiably relied on an agent’s representation.
Additionally, recent decisions have indicated that an insurer has a duty to deal
fairly w/ insured; that this duty is violated if insurer refuses to honor a claim;
and the insured has a cause of action for collecting damages.
Changing Measures of Damages
Compensatory Damages
Bodily Injury Cases
stuff (come back later)
More than before, compensation awards are based on identifying
separate elements of damage rather than one lump sum – leading to
higher total damages.
Another practice is “per diem” method where an attorney demonstrates
one day’s amount for suffering, and multiply by the # of days already
suffered and will suffer in the future to get total reward – leading again
to higher total damages.
Another is the use of economists as expert witnesses to state an opinion
as to increases in earnings through an entire work life expectancy (had
injury not occurred) and to predict probable reduced earnings – but this
method tends to offset the discount to PV, leading to too high an answer.
In addition, life expectancy has increased – increasing awards, and
medical costs are rising higher than price indexes.
Property Damage Cases
Punitive Damages
Countermeasures and the Net Impact of Changes
Damages Rules
Insurance Contract Provisions

Keeton, “The Impact on Insurance of Trends in Tort Law,” Issues in Insurance – SK (1984)
Proposals for Legislation Affecting Liability
The Scope, Impact, and Promise of Countermeasures Within Negligence Law
IV. Statutory Substitutions of Compensation Systems for Tort Law
Employee Compensation – A Total Substitute
No-Fault Automobile Insurance: A Partial Substitute
A Survey of No-Fault Laws
A total substitute (much like WC) for auto has been considered in Canada, but
never adopted in the US.
What is today called “no-fault” is actually a partial substitute – first appearing in
MA in 1971, then in 24 states by 1976, which can be classed in two classes:
1) add-on statutes: where negligence is maintained (no tort exemptions), but nofault is considered for provisions such as S&S and offset to coordinate benefits
to avoid double recovery: AR, DE, MD, OR, SC, SD, TX, VA.
2) partial-tort-exemption eliminate claims for some injuries (of less
consequence). Less serious injuries receive only no-fault benefits. More serious
injuries receive both no-fault and negligent benefits (with provisions for double
recovery): CO, CT, FL, GA, HI, KS, KY, MA, MI, MN, NV, NJ, NY, ND, PA,
UT.
Degrees of Partial Tort Exemption
States can differ even in how they define “less” serious from “more” serious.
Consider 5 categories: minor, substantial, moderate, serious, and severe.
Some states bar pain and suffering claims for minor: CT, NJ.
Some bar for minor and substantial (12 states).
Some bar for minor, substantial, and moderate: HI, MI.
The Uniform Motor Vehicle Accident Reparations Act would have barred all the
way up to serious injuries, but was never adopted.
Forms of Partial Tort Exemption
medical threshold – tort action is permitted if expenses are in excess of a stated
dollar amt. This can be unfair or create incentives to incur medical expenses
just to get over the threshold.
descriptive standard – a descriptive threshold. It doesn’t have the problems of a
financial threshold, but it can be up to interpretation in the courts.
deduction form damages findings – a technique never used by any state. There
is a deductible amount ($5000) of which you must overcome to collect for pain
& suffering, but it is deducted from the award. This could lead to a push for
higher awards to compensate.
Key Issues in the Controversy
Criticisms of existing auto negligent/insurance system follow:
1. System is an incomplete system of reparation. It leaves victims to bear too
much loss that could be paid through insurance.
2. System in inequitable. It pays some claimants more than others.
3. System is too slow in delivering payments.
4. System is wastefully expensive (admin costs) due to requiring case-by-case
determinations, and lump-sum findings of damages under indeterminate
guidelines.
5. System encourages routine exaggeration of claims and fraud.

Keeton, “The Impact on Insurance of Trends in Tort Law,” Issues in Insurance – SK (1984)
6. Negligence is impractical to prove in a large %-age of accidents.
7. Liability insurance is an unsatisfactory product – unattractive to consumers.
And if regulation causes rates to be too low, insurance becomes less available.
8. The system is self-contradictory in theory and self-defeating in practice.
Developments ensure that wrongdoers are protected by insurance from having to
pay, and victims are compensated from some source regardless of fault.
Responses to criticisms follow:
1. System is not designed to compensate for all loss – it’s designed to
distinguish between more deserving and less deserving victims and to
compensate the more deserving victims.
2. Negligence law is based on individual moral accountability.
3. Basing liability on negligence is a deterrent to careless conduct.
4. Difficulties of applying negligence laws to auto are exaggerated.
5. Critics of negligence system should offer a better alternative. Removing fault
would mean taking benefits from more deserving victims to pay benefits to less
deserving victims.
6. The shortcoming of System are less serious than those of any alternative.
7. If speedy payments are desired, a social welfare system should be chosen.
8. Compensation plans are a threat to the present private insurance system.
9. Court delay is a separate problem and can be bettered through providing
adequate courts and improved procedures.
10. Marketing and regulatory problems are separate from questions concerning
compensation. Any other system would do nothing to solve these problems.
11. A no-fault compensation plan would penalize low-risk drivers and provide a
bonus to those most responsible for causing injuries.
12. Predictions/assertions of greater efficiency/savings from an alternative are
greatly exaggerated.
Performance of No-Fault Laws
Proposals for Other Areas
V. Basic Premises of Compensation Systems
Six Influential Premises – some of these are in conflict with each other.
1. Decisions of entitlement (to compensation) and obligation (to pay) should be based
on fault.
2. Decisions of entitlement and obligation should be based on a standard that differs
from fault in usual sense (strict liability or compulsory loss insurance).
3. 3rd party liability insurance should be used not only for protecting the assets of
insureds, but also to protect plaintiffs against financial irresponsibility of defendants.
4. Private enterprise should be used for funding and management of insurance.
5. Broad protection for a minimal level of welfare should be secured for everyone.
6. The security system should be publicly funded and managed through govt insurance
or a tax system.
Three Combinations
Tort-Liability and Third-Party, Private-Enterprise Insurance (1), (3), (4) –
predominant in auto lines (pre-no-fault)
Strict Liability and Private-Enterprise Liability Insurance; No-Fault Compulsory

Keeton, “The Impact on Insurance of Trends in Tort Law,” Issues in Insurance – SK (1984)
Private-Enterprise Insurance (2), (4)
Automobile no-fault is similar to products strict liability, but strict liability isn’t
as limited as no-fault.
No-fault has been discussed in extending to med mal. Two problems follow.
1. With auto, no-fault insurance can save money by eliminating small claims,
resulting in costs similar to tort liability costs. With med mal, most injuries
would be more expensive, causing prices to rise.
2. With med mal, the admin costs savings would be nowhere near the savings in
auto no-fault. Causation would be difficult to prove.
Social Welfare Protection, Publicly Funded (5), (6)
Objectives of Compensation Systems – two key aims:
1. A good compensation system will be equitable from three perspectives: between
those who receive benefits; those who bear burden of costs among different
beneficiaries; and among different cost-bearers.
2. The system will contribute to protection, enhancement, and wise allocation of
society’s human/economic resources.
Foundation for Premises
VI. Relationships Among Tort Trends and Concepts of Insurance and Insurability
Inferences Regarding the Significance for Insurance of Tort and Economic Trends
1. These trends produce influences toward increases of claim costs at a rate in excess of
changes in general price indices.
2. Countermeasures to slow the trend of rising costs only ameliorate the trend to a
modest degree, but don’t promise to reverse the trend.
3. The fate of proposals for changes should consider their consistency with society’s
social, economic, and moral objectives.
4. These trends present problems to the insurance industry and require reexamination of
basic concepts of insurance and insurability.
New Problems and Their Challenge to Private-Enterprise Insurance
Insurance Consequences of Increased Costs: Expanded Markets and Reallocated
Expenditures – If rates stay attuned to exposures, then the increased exposures produce
both increased rates and increased profits. However, if rates rise too high, there could
be resistance and reallocation of expenditures in the economy.
Reduced Predictability of Pooled Exposures – As losses become less predictable,
some exposures may become uninsurable. etc.
This unpredictability is really evident in “long tail” lines such as professional
liability and products liability. In med mal, one way get around this is to switch
to “claims-made”. From the P/H’s perspective, they would see immediate
savings in premiums, but in future years, they would make up the difference as
more exposures fall into the “claims-made”.
VII. An Epilogue About the Future

Biggs, Statement of Jennifer L. Biggs, FCAS, MAAA, … July 10, 2003 – SK (selected pages)
 Biggs, Statement of Jennifer L. Biggs, FCAS, MAAA, … July 10, 2003 – SK (selected pages)
Introduction
History of Asbestos Usage
Health Risks Associated With Asbestos Exposure
Current Personal Injury Claim Situation
Concerns of Major Parties Involved in Asbestos (Personal Injury) Litigation
Seriously Injured Claimants
Nonseriously Injured and Unimpaired Claimants
Plaintiffs Attorneys
Judges
Major Asbestos Defendants
Peripheral Defendants
Insurers and Reinsurers
Prior Efforts to Solve the Asbestos Problem
Summary and Conclusions
Exhibit 4 – FAQ Regarding Asbestos Litigation
count Factors for Schedule O Lines

Troxel & Bouchie, Property-Liability Insurance Accounting and Finance (Fourth Edition) –
SK
Methods of Maintaining Solvency
Insurance Department Examinations
Purpose of Examinations
Examination Procedures
NAIC Examinations
Critique of the Examination System
NAIC Regulatory Tests
Purposes of the Tests
Mechanics of the System
Nature and Interpretation of the Tests
Overall Tests
Gross Premium to Surplus
Net Premium to Surplus
Change in Writings
Surplus Aid to Surplus
Profitability Tests
Two-Year Overall Operating Ratio
Investment Yield
Change in Surplus
Liquidity Tests
Liabilities to Liquid Assets
Agents’ Balances to Surplus
Reserve Tests
One-Year Reserve Development to Surplus
Two-Year Reserve Development to Surplus

Biggs, Statement of Jennifer L. Biggs, FCAS, MAAA, … July 10, 2003 – SK (selected pages)
Estimated Current Reserve Deficiency to Surplus
 Greene, "Government Insurers," Issues in Insurance – SK (1987)
I. Government Insurance
Roles of Government as an Insurer
Government as Exclusive Insurer
Government in Partnership with Private Insurers
Government in Competition with Private Insurers
Social Insurance Versus Other Government Insurance
Social Insurance
Other Government Insurance
Insurance Versus Social Welfare
Insurance Versus Government Indemnity
II. Types and Size of Federal Insurance Programs
Extent of Federal Insurance
Federal-Private Insurer Relationships
Partnership Roles
Competitor Roles
Exclusive Roles
Evaluation of Federal Programs
Loan Insurance
Property Insurance
Crop Insurance
Flood Insurance
Riot Reinsurance and FAIR Plans
Crime Insurance
Life Insurance
Pension Plan Insurance
OASDHI
Unemployment Insurance – objections include:
1) These laws differ in each state, causing inequities.
2) Some say benefits aren’t high enough. Others say they are too high – to
provide a disincentive to return to work.
3) Experience rating system is questionable. It assumes the employer alone can
control amt of unemployment, when it’s actually out of their control. Plus,
employers in unstable industries are already paying the max tax, so taxes can’t
be raised – creating an opportunity of temporary lay-offs on the govt.
4) “Suitable work” is defined such that workers could qualify for benefits even
though some type of work is available – a problem among seasonal workers.
5) Some workers may be ineligible for unemployment because the employer
was not required to purchase unemployment insurance.
6) Many people exhaust their benefits before being reemployed. Due to min and
max benefits – highly paid workers receive a small %-age restoration, while
low-paid workers receive a higher %-age. Also, no extra allowances for those
who have dependents.

Greene, "Government Insurers," Issues in Insurance – SK (1987)
7) In most states, the wage base is much lower than the actual wage earned.
This accentuates cyclical and seasonal variation in the employer tax burden.
III. Type and Size of State Insurance Programs
Workers Compensation
Evaluation of Workers Compensation Insurance
Temporary Disability Income Insurance
Evaluation of Temporary Disability Income Insurance
Maryland State Automobile Insurance Fund
Evaluation of MAIF
State Property Insurance
Financial Characteristics of the Plans
Reasons for Establishing the Plans
Evaluation of State Property Insurance
Insurance Guaranty Fund – main purpose is to guarantee payment of claims to P/Hs and to
prevent insolvencies.
Evaluation of Insurance Guaranty Funds – too new to determine, but theoretically, it
appears to be a sound development.
State and Local Pension Plans
IV. General Evaluative Statement
V. Government Health Plans Versus Private Health Insurance
VI. Analysis of the Rationale for Government Insurance
Reasons for Government Insurance
Residual Market Philosophy
Compulsion
Convenience
Efficiency
Collateral Social Purpose
Criticisms of Government Insurance
Residual market Philosophy
Compulsion
Convenience
Efficiency
Collateral Social Purpose
General Observations About Rationale
VII. Trends in Government Share of Insurance Markets
Federal Share
State and Local Share
State and Local Pensions
Workers Compensation Insurance
General Observation About Trends
VIII. Emerging Patterns in Government Insurance Programs
IX. Implications for Private Insurers (do we need to know this?)
X. Summary (do we need to know this?)

Feldblum (Sch P), "Completing and Using Sch P" (Eighth Edition), CAS Study Note – W
 Feldblum (Sch P), "Completing and Using Sch P" (Eighth Edition), CAS Study Note – W
(2003) (only IRIS section removed)
Part 2 – Incurred Losses – net
IRIS Loss Development Tests
IRIS Retrospective Tests 9 and 10
Test 9: divide the latest 1-yr reserve development in Summary by the P/H’s
surplus at end of prior year.
Test 10: divide the latest 2-yr reserve development in Summary by the P/H’s
surplus at end of 2nd prior year.
Ratio of 20% or more is exceptional, which must be commented on in the
Opinion. 4 or more exceptional scores may trigger a financial examination.
These test results are included in the Five-Year Historical Data exhibit.
IRIS Prospective Test 11 – O/S loss ratio = O/S losses & LAE at a given statement
date divided by the EP in that statement year. Test 11 updates O/S loss ratios from past
2 yrs using 1- 2-yr reserves developments, then compares these ratios to CY O/S loss
ratio.
There is a mismatch in premiums (current CY) vs. losses (all AYs). Volume
growth/decline, changes in the mix of business between prop and liab, changes
in types of policies issued distort the O/S loss ratio.
Test 11 Overview – lessening ratios can show evidence of under-reserving.
Restated O/S loss ratios: (1-yr reserve development + unpaid losses & LAE for
prior yr) / prior yr’s EP; AND (2-yr reserve development + unpaid losses &
LAE for 2nd prior yr) / 2nd prior yr’s EP.
Indicated O/S losses & LAE = avg of restated O/S loss ratios * current year’s EP
Indicated reserve deficiency = above – reported unpaid losses & LAE.
A deficiency greater than 25% of P/H Surplus is an exceptional score.
Illustration: IRIS Test 11
Growth, Mix by Line, and Policy Type
 Almagro/Ghezzi, "Fed Income Taxes-Provisions Affecting Property/Casualty Insurers" – W
Appendix B. Loss and Loss Expense Reserve Discounting (1988)
Payment Pattern
Determination year = 1987 and are every 5 years.
Secretary of Treasury establishes payment patterns at each determination year.
If a company has sufficient experience to place it in top 90% of all companies writing a
specific line, it can use its own experience. Also, the company must have WP for that
line for at least the # of yrs unpaid losses are required to be reported (for that line). Else
the company must use IRS patterns.
There used to be Sch O, which included International and Reinsurance. For those lines,
the aggregate of all Sch P lines should be considered.
If a company elects to use experience, it must do so until the next determination year.
If a company uses IRS factors, they are applied to the determination year and the
following 4 AYs. If they use company factors, they must revise the pattern for each AY
using the most recently files AS.
Interest Rate

Feldblum (Sch P), "Completing and Using Sch P" (Eighth Edition), CAS Study Note – W
These are based on a rolling 60-month average of 100% of the midterm AFR effective
at the beginning of each calendar month.
Discount Factors for Schedule P Lines
Discount Factors for Schedule O Lines
 IASA 2, Chapter 12: Taxation (Selected Pages) – L
Efficacy of the Annual Statement (starting 12-5)
Lots of detail here. In a nutshell, the AS is not always binding. The IRS can sometimes
successfully challenge its use in determining taxes.
Tax Rules Unique to Property and Liability Insurers
Introduction
IRC 832: (nonlife) insurance company taxable income = gross income minus allowable
deductions. Gross income includes U/W and investment income & other income.
Tax formula for nonlife is about the same as standard corporate tax formula except:
Reserves – ins cos may deduct increase in reserves for ests of unpaid losses.
UPR – Premium income deferred by 80% of the increase in UPR.
Proration – 15% of otherwise tax exempt interest income and dividends received
deduction are included in company’s income.
Underwriting Income
Premiums Earned – include in taxable income 20% of increase in UPR.
This “revenue offset” is supposed to accomplish a better matching of acquisition
expenses and premium income.
More detail – come back if more time.
Losses Incurred – expenses or operating costs are deductible.
The “all-events test” stipulates that a deduction for a liability can’t be claimed
until economic performance has occurred. This would mean that loss reserves
are not deductible. However, there is an exception that insurers can deduct loss
reserves on occurrences that have taken place. (no pure IBNR).
More detail – come back if more time.
Discounting Loss Reserves – insurers must discount their losses and LAE.
discounted unpaid loss at end of year = PV of losses determined by: the gross
amt; the pattern of claims payments; and interest rate.
If the reserves are already discounted, they must be undiscounted and then
rediscounted according to the tax discounting methodology.
There is a federal interest rate for each year, to be applied by AY.
Industry discount factors computed annually by Treasury based on: 1) the
determined interest rate and 2) Loss and LAE payment patterns.
Discrete vs Composite Factors on Long-Tail Lines
International and Reinsurance
Accident and Health Insurance
Election to Use Own Experience – once you decide to use experience, you
can’t revoke w/o permission from IRS. It’s based on “determination year” and 4
succeeding CYs.
Absence of an NAIC Annual Statement

Feldblum (Sch P), "Completing and Using Sch P" (Eighth Edition), CAS Study Note – W
Other than Calendar Year Returns
Fresh Start
Impact of Discounting on IRS Testing of Loss Reserves
Salvage and Subrogation
Expenses Incurred – IRC 832: expenses incurred = all expenses shown on the AS, but
deductible expenses must satisfy allowable categories.
Testing Estimates of Unpaid Losses – the IRS is entitled to test the reserves for unpaid
losses and LAE to determine if they are “fair and reasonable”.
The “all-events” test must be satisfied – such that a liability is fixed and
determinable. Also, the losses are timed such that they are deducted only in the
year of “economic performance”.
Investment Income = gross amt earned from interest, dividends, rent = amts received during yr
+ investment income “due and accrued at end of the taxable year”. Deduct amts “due and
accrued at end of preceding taxable year.”
Accrual of Discount and Amortization of Premium
Dividends – dividends received from domestic corporations are eligible for the
dividends received deduction (DRD).
DRD = 70% if recipient owns less than 20% of distributing corporation. It’s
80% if recipient owns at least 20% but less than 80%. It’s 100% if the recipient
owns at least 80%.
100% DRD is not limited, but the 70% and 80% deductions are limited to 70%
and 80% of taxable income before DRD, capital loss carryback, and net
operating loss deduction. (Limitation operative when taxable income is less
than gross dividends received.)
Proration-Exempt Investment Income – deduction for “losses incurred” must be
reduced by 15% of tax-exempt income and DRD with respect to bonds/stocks
purchased after Aug 7, 1986. More as time allows.
Capital Gains and Losses
Mark-to-Market
Abnormal Losses
United States Branches of Alien Insurers
Alternative Minimum Tax: Preferences Affecting Insurers
Overview
Typically, compute AMT by making certain adjustments to regular taxable
income to get “AMT income” or AMTI. Multiply AMTI by 20%, compare with
other tax amt, and pay the higher of the 2.
AMT = 20% of AMT over $40K. The $40K exemption is reduced 25 cents for
each $1 that AMTI exceeds $150K.
More as time allows.
Small Corporation Exemption – applies to companies that had avg gross receipts of
$5M or less for three tax yrs beginning with first tax yr after 12/31/96. After that the
corporation loses this exemption if the prior three tax yrs receipts are in excess of
$7.5M.
Adjusted Current Earnings (ACE) = 75% of excess of current yr’s earnings and
profits over pre-adj AMTI.

Feldblum (Sch P), "Completing and Using Sch P" (Eighth Edition), CAS Study Note – W
Components of ACE Adjustment and Pre-Adjustment AMTI
Pre-adjustment AMTI = regular taxable income + AMT adjs and preferences (no
ACE).
More.
Example of AMT Calculation
Step 1: Pre-adjustment AMTI = Regular taxable income (before NOL carryover)
+ preferences +/- adjustments. 1000 + 100 + 200 = 1300.
Step 2: ACE = Pre-adj AMTI + earnings & profits items – expenses related to
earnings and profits items + DRD other than the 100% DRD and DRD from
certain 20% or more corporations. 1300 + 550 – 100 + 150 = 1900.
Step 3: ACE adjustment = (ACE minus pre-adj AMTI) * 75%. .75(1900 –
1300) = 450.
Step 4: AMTI = Pre-adj AMTI +/- ACE adj – alternative tax net operating loss.
1300 + 450 – 0 = 1750.
Income Tax Accounting (starting at 12-65)
US GAAP
Balance Sheet Approach
Deferred Tax Assets
NAIC Accounting – Codification
Admissibility Standard
Recording Deferred Tax Provision
State Income Tax Provision
Disclosure Requirements
Tax Contingencies
State and Local Taxation (starting at 12-70)
State Taxes: Introduction
General Taxes
The Income Tax
The Franchise Tax
Unitary Reporting
Specific Taxes
Premium-Based Taxes
Basis
Rates
Credits
“In Lieu Of” Statutes
Retaliatory and Reciprocal Taxes
Retaliatory taxes connote a penal condition. These provisions are based on principle
that if the aggregate taxes/obligations imposed by state of a foreign/alien insurer are
greater than the taxes/obligations imposed by taxing state, then those same taxes/fees
are payable to the taxing state.
Reciprocal taxes denote a mutual return of favor. With these provisions, the taxing state
recognizes lesser obligations imposable on their domestic companies in foreign states.
Bottom line: If such taxes exist, the foreign insurer will pay the state the same taxes
they would pay to their domicile state.

Feldblum (Sch P), "Completing and Using Sch P" (Eighth Edition), CAS Study Note – W
Miscellaneous Taxes
Fire Prevention Taxes
Underwriting Profits Tax on Marine Coverages
Licensing and Filing Fees
Assessments
Guaranty Funds
Second Injury Funds (stop here?)
WC Funds
Med Mal JUA
Automobile Insurance Funds
State Boards and Bureaus
Other Insurance Assessments