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HMRC internal manual

Lloyd's Manual

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HM Revenue & Customs
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Syndicate accounts: accounting rules until 2004: three-year accounting

Until 31 December 2004 Lloyd’s syndicates used a form of three-year funded accounting on an underwriting year basis. Premiums, claims and associated expenses are related to the underwriting year in which the policy incepts. The recognition of profit or loss of the underwriting year is deferred until the year is closed, which is at the 36 month point at the earliest.

As a syndicate is an annual joint venture the profit or loss from business written in the year to which it relates must be separately accounted for. Under the three-year accounting system, the syndicate produced a single set of statements within which there were separate underwriting accounts for each underwriting year or ‘account’.

All premiums received go into a premium trust fund (PTF - see LLM1090), maintained by the managing agent. All claims and other expenses are paid from it.

No profit or loss is struck for the underwriting year at its 12-month point. Instead the balance of the ‘fund’ is carried forward for two years after the end of the underwriting year (that is, until the 36-month point). This allows time for claims to arise and liabilities to be quantified.

The profit or loss for the year is struck at the 36-month point by payment of a “reinsurance to close” (RITC) premium (LLM2060), unless the syndicate goes into “run-off” (LLM2070).

At any one time there are three open years of the syndicate, more if earlier years have gone into run-off. For example, in the case of a syndicate with no run-off years, at 31 December 2004

  • the accounts for the 2002 underwriting year closed and the profit or loss was struck
  • the accounts for the 2003 underwriting year were still open at their 24-month point
  • the accounts for the 2004 underwriting year were still open at their 12-month point.

For open underwriting years, the balance of income and expenditure was carried forward. A single balance sheet as at the accounting date pooled the assets and liabilities for all underwriting years covered by the accounts, with the balance on each underwriting year shown separately as a liability. Where an underwriting year was in a loss-making position, the balance would usually be shown as a negative liability, not as an asset.

The amount shown on the balance sheet as the balance on the closing year would rarely be the same as the amount shown in the underwriting year account for the same year. This was because the profit or loss shown in the underwriting year account did not take account of personal expenses (LLM2160). A note to the accounts reconciled the two figures.

LLM2200 gives an example of accounts prepared under three year accounting.