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HMRC internal manual

General Insurance Manual

Technical provisions: periods of account beginning on or after 1 January 2000 and ending before 19 July 2007: General Insurance Reserves (Tax) Regulations: overview of the calculation

Regulation 3 set out the detailed machinery, in the form of ten rules, by which it was determined whether or not a technical provision is excessive or insufficient, and for the calculation of the amount of ‘interest’ to be added to or deducted from profits. The core proposition of the rules was a comparison of:

  • the ‘original provisions’, that is the provisions for liabilities arising in a period as at the “balance sheet date” for each ‘earlier period of account’ beginning on or after 31 December 2000, and
  • the discounted value of the ‘cost’ of settling those provisions at a ‘recalculation date’. This date was the end of a ‘later period of account’ ending on or after 31 December 2001. The cost of settling included claims paid in the ‘later period’ and the provision established as at the recalculation date in respect of the original provisions not yet settled.

The recalculation of the ‘original provisions’ related to provisions which were ‘taken into account’. This meant taken into account for tax purposes, that is, those for which the insurer had a tax deduction (and so took account of an FA00/S107 (4) election).

The difference between the two figures, subject to a ‘margin for error’ represented the cumulative excess or deficiency for the later period. This was adjusted for amounts accruing for previous later periods.

Thus, for an insurer in business before the introduction of the legislation and with accounts drawn up to 31 December each year, the first earlier period of account to which the rules applied was that ending on 31 December 2000. The technical provisions in the accounts for this period, and for which it had a tax deduction, were recalculated as at 31 December 2001, 31 December 2002 and so on, until the liabilities of the period ending 31 December 2000 had been run off. The first ‘earlier period’ for any company already in business differed from later ‘earlier periods’. This is because the ‘original provisions’ for a period ending on 31 December 2000 included not only the provisions relating to liabilities first arising in that period, but also provisions as at that date for liabilities first arising in earlier years. In subsequent ‘earlier periods’ only the provisions for liabilities arising in the period were ‘original provisions’.

Regulation 5 of SI2003/2862 modified Rules 2 and 8 of regulation 3 to remove the ‘ten year rule’ which was a feature of the original regulations. The interaction between various aspects of the original rule would have led to some spurious and unintended results when the ten-year point was reached. In order to prevent these spurious results, the ten year roll up feature of the regulations was removed in the 2003 amendments.