Revenue & Customs Brief 04/09

Technical provisions made by general insurers: the 'appropriate amount' allowable for tax purposes

Finance Act 2007 repealed legislation (section 107 of the Finance Act 2000) that dealt with any differences between the technical provisions set by general insurers in their accounts against claims they expect to have to pay, and the eventual outturn of those claims. This legislation was complex and gave rise to lengthy calculations. The replacement legislation, in Schedule 11 to Finance Act 2007, is based on following the financial accounts, but allows an officer of HM Revenue & Customs (HMRC) to determine an amount, called the 'appropriate amount'. If the provisions set at the end of the period of account exceed this amount, the excess is not allowed as a tax deduction for that period, but a compensating adjustment (increasing the potential deduction) is made in the following period.

Schedule 11 to Finance Act 2007 allows the Commissioners of HMRC to make regulations setting out how the appropriate amount is to be determined. Following extensive consultations with representatives of the general insurance industry, arranged through the Association of British Insurers, an outline of the proposed methodology is reproduced below in the form of Parts 1 and 2 of draft regulations. This is subject to final agreement and the purpose of this Brief is to allow a short period of wider consultation. Comments should be sent to Victor Baker (Tel 020 7147 2616) as soon as possible. It is hoped to lay the regulations in March.

Part 1

Introductory provisions

Citation, commencement and effect

1. - (1) These Regulations may be cited as the General Insurers’ Technical Provisions (Appropriate Amount) Regulations 2009 and shall come into force on [date].

(2) In relation to a general insurer, other than a member of a Lloyd’s syndicate, these Regulations shall have effect in relation to periods of account ending on or after 31st December 2009.

(3) In relation to a member of a Lloyd’s syndicate, these Regulations shall have effect in relation to a syndicate return made in respect of profits or losses declared in the 2010 underwriting year or made in respect of any subsequent underwriting year.

Interpretation

2.- (1) In these Regulations a reference to Schedule 11 is a reference to Schedule 11 to the Finance Act 2007.

(2) In these Regulations:

  • “closed Lloyd’s syndicate” means a Lloyd’s syndicate that is not an open Lloyd’s syndicate
  • “general business” has the meaning given in paragraph 3(3) of Schedule 11
  • “general insurer” has the meaning given in paragraph 3(1) of Schedule 11
  • “Lloyd’s syndicate” has the meaning given in paragraph 3(9) of Schedule 11
  • “open Lloyd’s syndicate” has the meaning given in paragraph 3(8)(b) of Schedule 11
  • “period of account” has the meaning given in paragraph 3(5) of Schedule 11 and “periods of account” shall be construed accordingly
  • “Schedule 3 to the Accounts and Reports regulations” means Schedule 3 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (see note 1)
  • “syndicate return” means a return of a syndicate’s profit or loss for an underwriting year made under regulation 4 of the Lloyd’s Underwriters (Tax) Regulations 2005 (see note 2)
  • “underwriting year” has the meaning given in paragraph 3(9) of Schedule 11

Part 2

General insurers (other than members of Lloyd’s syndicates)

Appropriate amount of technical provisions: general insurers (other than a member of a Lloyd’s syndicate)

3. For a period of account, the appropriate amount of the technical provisions for the purposes of paragraph 1 of Schedule 11, except in the case of a member of a Lloyd’s syndicate, is the aggregate of:

  1. the amount of the provision for unearned premiums determined in accordance with paragraph 50 of Schedule 3 to the Accounts and Reports regulations 2008
  2. the amount of the provision for unexpired risks determined in accordance with paragraph 51 of Schedule 3 to the Accounts and Reports regulations 2008, and
  3. the estimated amount of the liabilities in respect of claims outstanding arising from the general insurer’s general business determined in accordance with regulations 4 to 6

Estimated amount of claims outstanding: confirmation by general insurer

4.- (1) Subject to regulation 5, for the purposes of regulation 3, the amount of the liabilities in respect of claims outstanding arising from the general insurer’s general business is the amount of those liabilities stated in the general insurer’s accounts for the period if conditions A to C are satisfied.

(2) Subject to paragraphs (5) to (7), condition A is:

  1. that the general insurer gives confirmation in writing that the amount of the liabilities stated in the accounts is not an excessive estimate of the amount of the liabilities, and
  2. the confirmation is founded on or supported by an opinion in writing given to the general insurer by an actuary or other suitably skilled person (which may include a director or employee of the general insurer) stating that the amount is not an excessive estimate of the amount of the liabilities

(3) Condition B is that the opinion referred to in condition A is given at, or immediately before, the time at which the technical provisions are adopted by the general insurer.

(4) Condition C is that the amount of the liabilities stated in the accounts is determined in accordance with regulation 6 (provisions supplementing regulations 4 and 5).

(5) For the purposes of condition A, an estimate of the amount of the liabilities is an excessive estimate unless the estimate includes no more than a reasonable margin to take into account the nature or type of risks to which the liabilities relate and the uncertainty in measuring those risks (see regulation 6(3)).

(6) Subject to paragraph (7), the confirmation referred to in condition A must accompany the general insurer’s company tax return which relates to the period of account (and if more than one company tax return relates to the period of account confirmation must be given with each return).

(7) If, at the time the company tax return is made, the general insurer has a reasonable excuse for not providing the confirmation with the company tax return, the confirmation may be provided to an officer of Revenue and Customs separately from the return but must be provided as soon as reasonably possible after the return is made.

(8) In paragraph (6) “company tax return” means a return under paragraph 3 of Schedule 18 to the Finance Act 1998 (see note 3).

(9) This regulation is subject to regulation 6 (provisions supplementing regulations 4 and 5).

Estimated amount of claims outstanding where conditions in regulation 4 are not satisfied

5. - (1) This regulation applies in a case where any of conditions A to C in regulation 4 is not satisfied.

(2) Where this regulation applies, for the purposes of regulation 3, the amount of the liabilities in respect of claims outstanding arising from the general insurer’s general business is the general insurer’s undiscounted best estimate of the future cash flows in respect of claims outstanding.

(3) For the purposes of paragraph (2):

  1. the reference to “best estimate” shall be construed as a reference to the mean of the distribution of the potential outcomes of the claims to which the estimate relates, and
  2. the best estimate of the future cash flows must be the best estimate available at the time at which the technical provisions are adopted by the general insurer.

(4) This regulation is subject to regulation 6.

Provisions supplementing regulations 4 and 5

6. - (1) Any calculation, computation or estimate required to determine the amount of the liabilities in respect of claims outstanding must be made in accordance with:

  1. standards set by the Board for Actuarial Standards in relation to the performance of actuarial functions, or
  2. where the general insurer is not resident in the United Kingdom, such other standards or provisions of the law of the territory in which the general insurer is domiciled as may reasonably be regarded as equivalent in effect to the standards referred to in sub-paragraph (a).

(2) In paragraph (1), “the Board for Actuarial Standards” means the operating body of that name of the Financial Reporting Council (see note 4).

(3) Any calculation, computation or estimate required to determine the amount of the liabilities in respect of claims outstanding must take into account:

  1. the nature or type of risks to which the liabilities in respect of claims outstanding relate, and
  2. the volatility and uncertainty associated with measuring those risks.

(4) Without prejudice to the generality of paragraph (3), the reference in that paragraph to taking into account includes, in particular, taking into account liabilities:

  1. on the basis of general insurance business reporting categories described in Annex 11.3 to Chapter 11 of Volume 1 of IPRU(INS), or
  2. on the basis of grouping of risks in accordance with the descriptions of accounting classes for general insurance business set out in Appendix 9.16 to Volume 2 of IPRU(INS)

(5) In paragraph (4), “IPRU(INS)” means the Interim Prudential Sourcebook for Insurers made by the Financial Services Authority under the Financial Services and Markets Act 2000 (see note 5).

(6) Any estimate of the amount of the liabilities in respect of claims outstanding shall be determined:

  1. net of reinsurance ceded, and
  2. in accordance with paragraph 53 of Schedule 3 to the Accounts and Reports regulations 2008.

(7) Any estimate of the amount of the liabilities in respect of claims outstanding may include:

  1. an allowance for the future inflation in the cost of claims; and
  2. in the case of net provisions, an allowance for reinsurance bad and doubtful debts

(8) The amount of the liabilities in respect of claims outstanding shall only include amounts that relate to contracts in force or enforceable at the time at which the technical provisions are adopted by the general insurer.

(9) A reference to claims outstanding includes:

  1. the expense of handling a future claim (whether allocated or unallocated), and
  2. a future claim which has been incurred as a liability of the general insurer but which is:
    1. not reported to the general insurer at the time at which the technical provisions are made, or
    2. reported, but not fully reported, to the general insurer at that time

(10) A reference in this Part to the time at which technical provisions are adopted is a reference:

  1. to the time at which the directors of the general insurer approve the general insurers’ annual accounts for the purposes of section 414 of the Companies Act 2006 (see note 6)
  2. in the case of a general insurer to which that section does not apply, to such similar time as may apply under equivalent provisions of the law of the territory in which the general insurer is domiciled; or
  3. in the case of general business carried on by a permanent establishment in the United Kingdom of a general insurer which is not resident in the United Kingdom and for which accounts of the permanent establishment are prepared for the period of account, the time at which the general insurer approves those accounts.

Footnotes

Note 1 - S.I. 20008/410

Note 2 - S.I. 2005/3338

Note 3 - 1998 c. 36; paragraph 3 was amended by paragraph 385 of Schedule 1 to the Income Tax Act 2007 (c. 3).

Note 4 - The Financial Reporting Council can be contacted at Planning and Resources, 5th floor, Aldwych House, 71-91 Aldwych, London, WC2B 4HN.

Note 5 - 2000 c. 8

Note 6 - 2006 c. 46

Issued 12 February 2009