Technical provisions: background: accounting practice
‘The amount of technical provisions must at all times be sufficient to cover any liabilities arising out of insurance contracts as far as can be reasonably foreseen.’
Accounting practice has reflected this since the ABI SORP of 1990. The 2005 ABI SORP states, at paragraph 95:
‘The level of claims provisions should be set such that no adverse run-off deviation is envisaged…In setting the provision, consideration should be given to the probability and magnitude of future experience being more adverse than assumed. Where there is considerable uncertainty concerning future events a degree of caution will be necessary in the exercise of the judgement required for setting provisions such that liabilities are not understated.’
This is the basis for adding a risk or prudence margin to the actuarial best estimate of outstanding claims liabilities, to allow for the possibility of an adverse deviation from the expected outcome. In accordance with the IAD, technical provisions of insurers need to be made on more prudential basis than is the case in other businesses.
The general provisioning standard FRS 12 does not apply to technical provisions made by insurers, but see paragraphs 238 to 247 of the ABI SORP which address the application of FRS 18 and FRS 12 to “Estimation Techniques, Uncertainty and Contingent Liabilities”.