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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Accounting framework: general principles of insurance accounting

The Insurance Accounts Directive (“IAD”) does not establish a different set of standards for insurance companies in comparison with other undertakings but rather it aims to deal with items affected by the special characteristics of insurance business: reporting format and disclosure. Accounts of companies based outside the EU will reflect the Home State’s own accounting conventions. The following description is based on UK practice.

UK GAAP accounting bases: annual and funded

Under UK GAAP, general insurance business may be accounted for on two different bases: the annual basis or the funded basis. These bases refer to the way in which profit is recognised:

  • Under the annual basis, the profits and losses of business written during the financial year are recognised at the end of that financial year by setting up provisions for outstanding claims, unearned premiums and unexpired risk provisions, and by deferring an appropriate portion of acquisition costs.
  • Under the funded basis, the recognition of profits (but not losses) is deferred for up to three years after the end of the financial year in which the business incepts.

GIM2050 explains how ABI SORPs over the years have reduced the scope of applying funded accounting. The December 2005 ABI SORP says simply that underwriting results should be determined on an annual basis. However, Lloyd’s syndicates continue to produce ‘syndicate underwriting year’ accounts, modified funded accounting on a three year basis, unless all the syndicate members agree to dispense with them. They produce statutory annual accounts in addition. See LLM2030 and LLM2040. Syndicate underwriting year accounts diverge somewhat from true funded accounting; for example, no provision is made for anticipated losses but rather a ‘cash call’ may be made of the syndicate members.

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Reporting underwriting performance: accident year and underwriting year

While there are only these two accounting bases under UK GAAP, there are also two methods of reporting the underwriting performance of a general insurance business for regulatory return or other statistical or management purposes - the accident year basis and the underwriting year basis:

  • The accident year basis measures performance in relation to the events and earnings of a financial period, irrespective of when the relevant policies incepted.
  • The underwriting year basis measures performance in relation to ultimate losses and premiums written in respect of policies incepting in the financial period, irrespective of when events (premiums, claims and expenses) occur.

A general insurer will therefore have a basis on which it recognises profit (annual or funded) and also have a system for reporting underwriting performance (accident year or underwriting year).