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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Taxation of general insurance: funded accounting: an example

The example at GIM2210 had the following technical account:

Marine insurance Co Ltd - accounts to 31 December 2000

 

Technical Account £m
   
Income  
Fund @ 1 January 18
Reinsurance recoveries 22
Premiums 53
   
Expenses  
Reinsurance premiums (26)
Claims (42)
Expenses (5)
Fund @ 31 December (17)
   
Underwriting result 3

 

The accounts for year ended 31 December 2000 allow the results for the year ended 31 December 1998 to be finalised for tax purposes as this is 3 year business. The example analysed the 2000 accounts results 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) (5) (7)
  Underwriting result 3 4   (1)

 

 

The result of the 1998 (underwriting year) business reflected in the accounts to 31 December 2000 on the closure of the fund is therefore £4m. This final result for the 1998 underwriting year is the consequence of three years’ development, which will have been reflected in three separate sets of accounts, to 31 December 1998 (first year), to 31 December 1999 (second year), and to 31 December 2000 (third year). This can be understood by reference to the table below.

 

 

Results of 1998 funded business in:- 1998 a/cs 1999 a/cs 2000 a/cs Total
         
         
Income        
Fund b/f   13 13  
Reinsurance recoveries 3 4 15 22
Premiums 49 7 (2) 54
Expenses        
Reinsurance premiums (27) (2) (1) (30)
Claims (8) (8) (15) (31)
Expenses (4) (1) (1) (6)
Fund c/f (13) (13) (5)* (5)*
Underwriting result for 1998     4 4

 

 

  • Fund c/f at 31 December 2000 is actually the true closing provision for 1998 business, rather than a fund, and may include equalisation reserves.

 

The computations for the accounting period ended 31 December 2000 in this example will therefore disallow the underwriting profit shown in the 2000 accounts (£3m), and replace it with the aggregated figure for the 1998 underwriting year (£4m) from three sets of accounts. To check figures against the FSA return, reference could be made to Forms 24, 25, 28, and 29 (see GIM3200). It was necessary to aggregate the figures on several forms to arrive at the total reflected in the accounts. The fund for an open year of account appears at line 20 on Form 25. The provision for a closed year account appears at line 29. The final result for 1998 therefore combined the open year figures for premiums, claims, and expenses from Forms 24/25 from the 1998 and 1999 returns, together with the closed year figures for 1998 (and all earlier years) from the 2000 return. The closing figure for the technical provisions was that appropriate to 1998 (and earlier years) as shown in the 2000 return.

Line 19 on Form 25 could be used in an open year where there was an anticipated loss for a year in one class of business accounted for on a funded basis, and an anticipated surplus in another. Such anticipated profits and losses might, in certain circumstances, be offset against one another. They had no effect on the tax computation, but a possible risk was that where losses had been anticipated for an open year, they might in error also be allowed in the tax computation for the closed year.

Funded business is frequently written in currencies other than sterling, and exchange differences can be significant. The basic rules for currency accounting described in GIM4130 apply to funded accounting in the same way as they apply to annual accounting. If profits or losses are recalculated when the fund is replaced, they will be translated using rates prevailing for the underwriting year, and not any later period.