What includes a requirement that 20 percent of the change in net unearned premium reserves be included in payable income?

Question

Options

• AReinsured income
• BTax law
• CLoss adjustment
• DReserve discounting

• A
  16% (10)
• B
  72% (46)
• C
  5% (3)
• D
  8% (5)

Explanation

Tax law (B) is correct because U.S. tax law - specifically IRC Section 832 - requires property/casualty insurers to include 20% of the change in net unearned premium reserves in taxable income. This provision exists because unearned premiums are not fully offset by actual incurred costs, so Congress mandated that 20% be treated as equity already earned and therefore taxable.

Reinsured income (A) is wrong - reinsurance income refers to ceded/assumed premium flows between insurers, not a reserve inclusion rule.

Loss adjustment (C) is wrong - loss adjustment expenses relate to the cost of investigating and settling claims, an entirely separate line item from unearned premium reserves.

Reserve discounting (D) is wrong - discounting adjusts loss reserves to present value for tax purposes under IRC Section 846, which is a distinct concept from the 20% unearned premium rule.

Memory tip: Picture the IRS taking a "20% bite" out of your unearned premiums - the government doesn't let insurers defer 100% of that reserve, only 80%. If you remember "20% unearned = tax law's concern," you'll anchor this to IRC Section 832 on exam day.

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