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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Accounting framework: example of funded accounting

This example has been included in case funded accounts should be received from insurers whose reporting is governed by foreign law. From 1 January 2005, UK companies must use annual accounting. An example of three year syndicate underwriting accounts appears at LLM2210.

The accounts of a company using funded accounting will also show a technical and a non-technical account. They will not include a UPP, and the treatment of provisions will differ. A simple example might be:

Marine Insurance Co Ltd - Accounts to 31 December 2000

 

Technical Account   £m  
       
Earned premiums net of reinsurance      
Gross premiums 53    
Outward reinsurance premiums (26)   27
       
Claims incurred, net of reinsurance      
Claims paid gross (42)    
Reinsurers’ share 22 (20)  
       
Change in the provision for claims      
Gross amount 11    
Reinsurers’ share (10) 1  
Total claims incurred, net of reinsurance     (19)
       
Net operating expenses     (5)
       
Balance on technical account     3

 

 

The non-technical account will also look the same as that of a company accounting on an annual basis.

 

However, the figures in the technical account comprise income and expenditure notified in the accounts to 31 December 2000 and includes items for each of the three underwriting years up to 31 December 2000 which can be broken down as follows:

 

 
  Total 1998 (and earlier) 1999 2000  
           
    £m £m £m £m
  Income        
  Fund @ 1 January 18 13 5  
  Reinsurance Recoveries 22 15 5 2
  Premiums 53 (2) 5 50
  Expenses        
  Reinsurance Premiums (26) (1) (1) (24)
  Claims (42) (15) (8) (19)
  Expenses (5) (1) (1) (3)
  Fund @ 31 December (17) (5) a (5) b (7) c
  Underwriting Result 3 4   (1)

 

 

In the above example, the fund at 31 December 2000 would comprise:

 

  • outstanding claims provision for 31 December 1998 and prior years £5m (a)
  • a cumulative figure to date for the year ended 31 December 1999 of net premiums (£4m) less net claims (£3m) and expenses (£1m) and (if appropriate) provision for any anticipated loss (nil), after a reversal of last year’s provision (£5m), which comes to £5m (b)
  • net premiums (£26m), less net claims (£17m) and expenses (£3m) for the year ended 31 December 2000 (£6m), plus the anticipated loss for the year (£1m)(e), giving a total fund of £7m (c).

The total underwriting result disclosed in the accounts is not a meaningful figure for tax purposes, as it reflects the development of results for three different underwriting years.

See GIM4150 for an example that arrives at the underwriting result for 1998 by taking the 1998 column above (1998 underwriting year results from the 2000 accounts, when they are closed at the end of year 3) and combines it with the 1998 underwriting year results from the 1999 accounts (end of year 2) and with the 1998 underwriting year results from the 1998 accounts (end of year 1).