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General Insurance Manual

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

Regulation 3: Rule 5: discounting

The ’liabilities’ defined in Rule 3 (the costs of settling the original provisions as at the recalculation date) were to be discounted between the balance sheet date and their date of payment. This period was the ’discount period’ and was intended to extend for no more than ten years after the original provisions arose.

The discount rate to be used was prescribed in the Regulations by reference to the earlier period of account. This meant that the same discount rate would always be used for the recalculation of a given earlier period. So given that the discount rate for the 2000 period of account was 2.79%, any liabilities of the 2000 period of account settled on 31 December 2005 would be discounted at 2.79% for five years. As the discount rate for the 2001 period of account was 2.742%, any liabilities for that period settled on 31 December 2005 would be discounted at 2.742% for four years.

Rule 5.4 set out the formulae used in calculating the discount rates to be applied in the calculations. The sterling discount rate was set annually and calculated from 5 year UK Gilts rates (averaged over five days around the end of the period of account) less a 2.3% risk margin. Where the calculations were made in one of six other currencies, a specific discount rate was used for that currency, based on the LIBOR rate on 12 month deposits (shown on the BBA website), again less the 2.3% margin. The rates were

Accounting period 

Currency 31/12/00 31/12/01 31/12/02 31/12/03
         
Sterling 2.79% 2.742% 1.944% 2.4%
Euro 1.68609% 1.58679% 0.68950% 0.26625%
US dollar 2.94109% 0.67091% 0% 0%
Canadian dollar 2.49692% 0.55258% 0.90358% 0.68792%
Australian dollar 2.75109% 2.61779% 2.65775% 3.68125%
Swiss franc 0.34692% 0.27258% 0% 0%
Japanese yen 0% 0% 0% 0%

Accounting period 

Currency   31/12/04 31/12/05 31/12/06
         
Sterling   2.186% 1.86% 2.734%
Euro   0% 0.13688% 1.19088%
US dollar   0.35475% 2.12875% 2.520275%
Canadian dollar   0.07808% 1.32042% 1.40775%
Australian dollar   2.72725% 2.99375% 3.79775%
Swiss franc   0% 0% 0%
Japanese yen   0% 0% 0%

A rate less than zero was set to zero - Rule 5.4(b).

The discount for each liability should in principle have been computed separately but statistical methods could be used where these gave approximately the same result. For example, it might be appropriate to assume that all claims were paid exactly half way through the period, provided this gave approximately the same result as individual calculations. It would not have been appropriate to assume (unless in accordance with the fact) that liabilities were settled on the first day of the period, as this would have understated the effect of discounting.

The aggregate of the discounted liabilities was known as ‘the recalculated provisions’ for the earlier period of account.