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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Accounting framework: funded accounting: open and closed years

Funded accounting in general insurance is a form of ‘non-annual accounting’ as described in the Insurance Accounts Directive and reflected in company law - see GIM2140. When the ‘fund’, or interim claims provision, is replaced by a true outstanding claims provision the account is said to be ‘closed’.

Commonly, the accounts are closed after 3 years, and the financial statements produced then will show the final result of the underwriting or inception year that began three years previously. In addition, they will show results, through the creation of funds, of the open year that began two years previously and of the open year that has just ended.

The funds are calculated by deducting expenses and net claims from net premiums and adding, if necessary, a provision for anticipated loss. It follows, that, unless a loss is anticipated, the fund is simply a balancing figure and there is zero profit for the open years.

The whole of the premium income arising on an annual policy written in, say, September 2008 (underwriting year 2008) will be treated as income for the year to 31 December 2008, and there will be no unearned premium provision at that date. Similarly, all claims arising on the policy will be treated as referable to 2008. So if an event giving rise to a claim occurs in July 2009 on that policy, the cost of that claim will also be related back to the 2008 underwriting year.

The underwriting year is closed by striking a balance of profit that includes a provision for all outstanding claims relating to policies incepting in that year. For multi year policies, provisions for unearned premiums and unexpired risks are created in accordance with annual accounting principles, to ensure that only the results of a twelve month period are recognised.

As explained above, losses for open years will be recognised in the financial statements as soon as it appears these will arise. The underwriting result disclosed in the financial statements prepared on a funded basis will, along with developing open years, include the result for the underwriting year closed at the end of the development period with the creation of an unpaid claims provision made by adding an estimate of further unpaid claims to the claims which have developed during the open years, enabling a more accurate figure to be computed with the benefit of hindsight. In addition, the accounts may include adjustments to the expected outcome for previously closed years.

How funded accounts may be used to produce the profit of an underwriting year for tax purposes is explained at GIM4140.