Spreading the deduction for ultimate incurred losses and loss adjustment expense reserves ("LAE") over a number of years is called:

Question

Options

• AInference
• BAbstraction
• CTake off
• DDiscounting

• A
  11% (2)
• B
  6% (1)
• C
  6% (1)
• D
  78% (14)

Explanation

Discounting (option D) is the actuarial and tax accounting practice of adjusting loss reserves to reflect the time value of money - since reserves will be paid out in the future, not all at once today, their present value is lower. Tax law (e.g., IRS rules under IRC §846) requires insurers to spread the deduction over multiple years using discount factors, rather than deducting the full nominal reserve immediately.

Why the distractors are wrong:

• A. Inference - a logical reasoning process; has no connection to reserve deductions or time-value adjustments.
• B. Abstraction - refers to simplifying or generalizing a concept; unrelated to financial reserve treatment.
• C. Take off - not a recognized term in actuarial science or insurance accounting.

Memory tip: Think of a store discount - it reduces the face value of something. Discounting reserves reduces their present value because future dollars are worth less than today's dollars. If you're "spreading a deduction over years," you're applying a discount rate across time - that's discounting.

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