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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Technical provisions: appropriate amount Regulations: the alternative rule

In most cases it is expected that the conditions set out at GIM6610 will be satisfied. If they are not, the alternative rule is the relatively simple and straightforward one that the liabilities representing unpaid claims are to be computed as the undiscounted best estimate of the future cash flows in respect of the claims outstanding, and this is further clarified as referring to the mean of their distribution. This is a technical description of the best estimate, but in practice the manner in which it is arrived at will be accepted unless there is good reason to question it with the aid of the Government Actuary.

As the best estimate is not discounted, it will reflect the implicit risk margin outlined at GIM6610. As explained there, some lines of business may justify an additional risk margin, but catering for that would be difficult. This method might therefore sometimes understate the provisions for the period of account. It is, however, unlikely that insurers will use this method creatively (as a kind of provisions disclaimer) because the accounts figure will stand unless an HMRC officer takes the initiative in applying FA07/SCH11, and financial accounting and regulatory reporting rules will ensure that sufficient margin is added to avoid under-provisioning.

If the company gives notice of a proposed alternative provisions figure, smaller than that appearing in the accounts, and confirms that it is, in the opinion of a skilled person in the terms of GIM6610, a figure that is ‘not excessive’, it should be accepted (without confirming the actual methodology) unless applying the risk factors outlined at GIM6650 there appear to be good grounds for enquiry. The approach should be not to challenge the opinion of a skilled person unless there are sound reasons to do so.

The aim of this approach is to deliver a fair figure for the amount deductible - a risk adjusted best estimate - where confirmation in the terms of GIM6610 cannot be given. It follows that the company should be asked for its assurance that

  • confirmation in the terms of SI2009/1926 regulation 5(2) condition A could not have been given
  • the figure proposed is both sufficient (regulation 8(7)(b)), and not excessive.

If these confirmations are not forthcoming the statutory basis will be applied and the HMRC officer will consider whether the accounts figure should in fact stand (FA07/SCH11/PARA1 (2)).