Technical provisions: appropriate amount Regulations: the main rule
There are two steps
- an actuary or other suitably skilled person must give an opinion in writing, current at the time the liabilities are determined, that the amount stated in the accounts is not excessive
- the company must give confirmation in writing that the liabilities representing unpaid claims are not excessive, founded on or supported by the opinion just mentioned, or propose an alternative figure.
An estimate is considered excessive if it exceeds a best estimate of the liabilities together with a reasonable margin for risks and uncertainties. The skilled opinion is of crucial importance here. The actuarial Institutes may provide guidance to the profession on these issues, and the Government Actuary must be consulted if any enquiries are raised about best estimates or risk margins.
The confirmation is expected to accompany the return to which it relates. Like the return, it is given on behalf of the company. Corporation tax returns may be signed by any person duly authorised on behalf of the company, and a similar approach applies to the confirmation. If, exceptionally, two returns relate to a single period of account, confirmation is only required with the first of them. Notice of confirmation is accepted separately if there is a reasonable excuse, provided there is no unnecessary delay in supplying it.
It is up to the general insurer to decide what the confirmation in writing will consist of. In most cases, the directors will receive a comprehensive actuarial report. The company may decide to supply this, or a summary of it, as the full report may require considerable expertise to understand. On the other hand, the general insurer may simply supply a statement, signed by the authorised person, that the amount of liabilities representing unpaid claims is not an excessive estimate. The supplementary information the general insurer has chosen to supply will be a factor in the risk assessment.
The opinion may be given by any suitably skilled person. This may be an actuary (or exceptionally a lawyer or engineer) employed by the company or by consultants. The actuarial function should be carried out by persons with sufficient knowledge of actuarial and financial mathematics. In small general insurers, it may be that the only person within the company with the necessary experience is also a director with responsibility for signing off the accounts which contain the provision. Where the person giving the confirmation is a director or employee of the company, their status must be identified. If the person is a director of the company, this will be a factor in the risk assessment.
Risk assessment is dealt with at GIM6650. It does not follow that the provision of a simple statement, or non separation of responsibility, will be decisive. They are simply factors that need to be weighed according to the wider background: for example, the company’s behavioural history, disclosure, and its size and structure.