Technical provisions: periods of account beginning on or after 1 January 2000 and ending before 19 July 2007: General Insurance Reserves (Tax) Regulations: example of a calculation
An example of a FA00/S107 calculation is set out below. The example shows an original reserve in respect of future liabilities of £5000 and gradual payments of claims and releases from reserves over the following ten years. It shows the amount of the recalculated provision at the discount rate of 2.79% specified for liabilities arising in 2000, and assumes an interest rate of 5.07% (the interest rate for 2001) throughout the period in which adjustments arise. In practice the interest rate will vary from year to year (see GIM6310).
|Year||Prov’n||Paid||Prov’n + Paid||Recalc Provision||Margin||Cumul. Excess||Excess this year||Add to profit|
|2 + 3||4 * discount||5% *|
|(5 + 6)||7(cy) -|
|7(py)||8 * int|
A number of points assist in understanding the above table.
In each year the amount of the recalculated provision is the sum of the amount of the provision set at the end of that year, plus the amount of any claims paid in that year and in all earlier years.
This figure is then discounted up to the date of payment. In the case of the closing provision this is the end of the period. In the case of claims paid it is assumed that these are paid on average at the mid-point in the year. Companies were free to use the actual date of payment or another average date if they have the information to justify this.
So, for example, the recalculated provision of £4396 for 2002 represents the sum of the provision of £3000 (discounted from 31/12/00 to 31/12/02), plus the discounted cost of £800 claims settled in 2001 (assumed to be settled 30/06/01), plus the discounted cost of the £800 claims settled in 2002 (assumed settled 30/06/02).
This discounted amount is compared to the original £5000 reserve, and the 5% margin deducted. The result is the cumulative excess. The cumulative adjustments in previous intervening years were then deducted to arrive at the adjustment for that year.
This figure x 3.675% (5.07% x 70% - reflecting the fact that an interest charge would normally be an allowable deduction from profits), compounded for the relevant number of years, gives the actual tax addition.
The above table provides the addition required in respect of year 2000 liabilities. Similar calculations are needed for the liabilities of 2001, 2002 and so on. The sum of all these is the amount of the tax adjustment in any later period of account.
Some firms developed their own spreadsheets for use by their clients. It was intended that the rules should operate in a fairly mechanical fashion. In most cases insurers and their agents prepared the calculations using spreadsheets or similar software.