Discounting of Loss Reserves in the Property and Casualty Insurance Industry

This report is intended to explain discounting to those unfamiliar with the concept, to present information on its use, to bring together the arguments for and against discounting, and to offer appropriate recommendations. Solvency regulation, the Canadian tax structure, pricing ramifications, interest rate issues, use of discounting by the rest of the world, and administrative costs are considered. The subcommittee concludes that although there may, in certain situations, to a conceptual basis for the use of discounting in the Property and Casualty insurance industry, the subject requires further study. Any premature introduction would jeopardize the benefits which might arise from its use. Further study should consider the discount rate, preparation of financial statements, measuring adequacy of discounted reserves, and taxation. The subcommittee recommends a five year initiative to study these issues. KEY WORDS: Accounting, Financial Reporting, Statutory, Canadian Issues, Actuaries, Exam Part 7C, Discounting, Taxes.