"Industry" discount factors are computed and published by the Treasury annually and are based on which of the following factor?

Question

Options

• Athe interest rate which is determined by the Treasury annually
• Bloss and loss adjustment expense payment patterns
• CBoth A and B
• DNeither A nor B

• A
  6% (1)
• C
  81% (13)
• D
  13% (2)

Explanation

Option C is correct because the Treasury's "industry" discount factors-used for discounting unpaid loss reserves for federal income tax purposes under IRC Section 846-are derived from both components working together. Neither factor alone is sufficient to produce a discount factor; you need a rate to discount with and a payment schedule to discount.

Why A alone is wrong: The interest rate (based on the applicable federal mid-term rate) tells you how much to discount each dollar, but without knowing when those dollars are paid, you cannot compute a discount factor. The rate is necessary but not sufficient.

Why B alone is wrong: Loss and LAE payment patterns tell you when payments are made by line of business, but without an interest rate you cannot translate future payments into present values. Patterns are also necessary but not sufficient.

Memory tip: Think of a discount factor as a recipe requiring exactly two ingredients - a rate (what Treasury sets) and a schedule (when losses actually get paid). Remove either one and you can't bake the factor. "Treasury sets the rate, history sets the timing - you need both."

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