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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Accounting framework: annual accounting: general

Paragraph 23 of the 2005 ABI SORP provides a definition of annual basis of accounting as:

“A basis of accounting for general insurance business whereby a result is determined at the end of the accounting period reflecting the profit or loss from providing insurance cover during that period (including the anticipation of losses arising on cover to be provided in subsequent periods in respect of commitments entered into prior to the end of the accounting period) and any adjustments to the profit or loss of providing insurance cover during earlier accounting periods.”

Accident year reporting

The annual basis of accounting is usually employed in conjunction with accident year reporting. This is conventional accruals accounting. Premiums are regarded as earned over the period for which cover is provided, and the amount for the reporting period is compared with claims arising from events that occurred in that period. So if an insurer makes up its accounts to 31 December, and enters into a twelve-month contract to insure a car on 1 September 2008, one third of the premium will be earned in 2008. This will be compared in the 2008 accounts with the cost of any claims made and estimated to be made (see the concept of IBNR at GIM2160) in relation to accidents or other incidents occurring between 1 September and 31 December 2008.

The profit or loss from providing cover during an accounting period is arrived at through the creation of

  • an unearned premiums provision (UPP, often still referred to as UPR - unearned premiums reserve; see GIM2100)
  • a provision for deferring acquisition costs (GIM2120), and
  • an unexpired risks provision (URP, often still referred to as URR - unexpired risks reserve; see GIM2130).

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Underwriting year reporting

Annual accounting results can be reported on an underwriting year basis, using information from the regulatory return forms 24 and 25, although the underwriting year basis is more commonly associated with funded (or non-annual) accounting - see GIM2140. The effect of this (reference to the forms helps to illustrate) is to allocate the annual accounting results to the years the contracts incepted. A provision for unearned premiums (see GIM2100) is not therefore needed except in the case of multi-year policies, where there will be an unearned premium provision to spread premiums, possibly together with provisions for unexpired risks (GIM2130) and to defer acquisition costs (GIM2120), to allow for the extended contract term. A provision is made for unpaid claims arising from the business that incepted in the year, restricted where necessary to a year’s cover.

Provided that full technical provisions are established for each underwriting year, a technical account produced for insurance business accounted for using annual accounting on an underwriting year basis will look the same as a technical account for the same business using annual accounting on an accident year basis. See the example at GIM2091.