- 11 -
The fresh start provision, however, created the potential
for abuse. Because the difference between the undiscounted and
discounted loss reserves as of yearend 1986 is excluded from
taxation, P&C insurers could manipulate the fresh start provision
by inflating their reserves. To prevent this abuse, Congress
excluded "reserve strengthening" from the fresh start.
TRA '86, however, did not define "reserve strengthening".
Generally, a P&C insurer's loss reserves may increase due to
either of two factors: (1) Additions required to fund existing
and increasing obligations under policies in force, or
(2) additions required when a method or assumption used in
calculating reserves is changed to produce higher reserves. As
discussed in more detail below, respondent argues that "reserve
strengthening" encompasses both types of additions, while
petitioner contends that the term refers solely to additions
resulting from changes in reserving methods or assumptions.
II. The Statute, Legislative History, and Regulations
The House of Representatives initiated the provision
requiring P&C insurers to discount their loss reserves. H.R.
3838, 99th Cong., 1st Sess. secs. 1021-1027 (1985). The Senate
amended the House's proposal to include both (1) the fresh start
provision and (2) the exclusion of "reserve strengthening" from
the fresh start. See S. Rept. 99-313, at 510 (1986), 1986-3 C.B.
(Vol. 3) 1, 510. Ultimately, the conference committee
substantially revised the "reserve strengthening" language
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011