SOFA-CFE · Question #131
The discounted unpaid loss as of the end of any tax year is the present value of losses determined by reference to which of the following factor?
The correct answer is D. All of the above. Option D is correct because computing the present value of discounted unpaid losses requires all three factors simultaneously: you need the gross (undiscounted) loss amount as the starting figure, the claim payment pattern to determine when those dollars are paid out over time…
Question
The discounted unpaid loss as of the end of any tax year is the present value of losses determined by reference to which of the following factor?
Options
- Athe gross amount
- Bthe pattern of claims payments
- Cthe rate of interest
- DAll of the above
How the community answered
(24 responses)- A4% (1)
- B8% (2)
- C17% (4)
- D71% (17)
Explanation
Option D is correct because computing the present value of discounted unpaid losses requires all three factors simultaneously: you need the gross (undiscounted) loss amount as the starting figure, the claim payment pattern to determine when those dollars are paid out over time, and the interest rate to discount those future cash flows back to present value. Under IRC Section 846, the IRS mandates industry-wide loss payment patterns and a prescribed discount rate, making each element a required input - not an optional one.
Options A, B, and C are not "wrong" in isolation - each is a genuinely necessary component - but choosing any one alone is incomplete, which makes each a partial (and therefore incorrect) answer on its own.
Memory tip: Think of it as a present value formula: PV = f(Amount, Timing, Rate). Discounted unpaid losses are just a present value calculation, so you always need all three legs of the stool - gross amount (how much), payment pattern (when), and interest rate (at what rate). If any leg is missing, the stool falls.
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