GIM2050 - Accounting framework: Association of British Insurers: Statements of Recommended Practice 1990, 1998, 2003 and 2005

ABI SORP: 1990 and 1998

The key changes between the ABI SORPs of 1990 and 1998 were as follows:

• Annual accounting (see GIM2090) was the recommended accounting treatment for all kinds of insurance business, deferred annual accounting was outlawed, and fund basis was acceptable for 2, 3 or 4 year funds but only in certain restricted situations.
• The revenue account was now referred to as the technical account and the profit and loss account as the non-technical account.
• The application of certain Financial Reporting Standards was covered, including FRS 7 (Fair value of claims provisions on acquisition), FRS 3 (Reporting financial performance of business in run-off), and FRS 5 (Reporting the substance of general insurance and reinsurance contracts).
• The treatment of accounting for investments (see GIM2190), Equalisation reserves, IAD rules on discounting of claims reserves, and guarantee levies was dealt with.

ABI SORP: November 2003

In November 2003 the ABI issued a revised SORP, which applies for accounting periods beginning on or after 1 January 2004. It contained updated guidance on the relationship between generally accepted accounting practice, the requirements of Schedule 9A CA 1985, and regulatory rules. The key differences between the 2003 SORP and the 1998 SORP were as follows:

• The annual basis (see GIM2090) was the only acceptable basis for underwriting results, except for Lloyd’s corporate capital vehicles, which could continue to use the fund basis where information about premiums and claims was insufficiently reliable because of Lloyd’s three-year accounting system.
• The application of Financial Reporting Standards issued since 1998 was covered, in particular FRS 15 (Tangible Fixed Assets), FRS 17 (Retirement Benefits), FRS 18 (Accounting Policies, including estimation techniques, uncertainty and contingent liabilities) and FRS 19 (Deferred Tax).
• Accounting for deferred tax arising from the application of FA00/S107 was covered.
• General principles addressing reinsurance transactions were added to ensure the SORP was in accordance with FRS 5 ‘Reporting the Substance of Transactions’.
• Improved disclosures were required in relation to estimation techniques, uncertainty and contingent liabilities which, notwithstanding that FRS 12 (Provisions, contingent liabilities and contingent assets) does not apply to insurance contracts, had the effect of applying some of the FRS 12 disclosure requirements to insurers’ contracts with policyholders.

ABI SORP: December 2005

The December 2005 version of the SORP applies to accounting periods beginning on or after 1 January 2005. The main changes in this new version arise from the introduction into UK GAAP of FRS 26 (on Financial Instruments) and FRS 27 (Life Assurance). While FRS 27 does not have any impact on general insurance business, FRS 26 may have application in the accounts of general insurers.

FRS 26 applies to listed insurers (from 1 January 2005) and to insurers with derivative contracts measured at fair value (from 1 January 2006, although earlier adoption is encouraged). One key aspect of the standard is the inclusion of a new definition for “insurance contract” and the requirement for contracts to be accounted for as investment contracts if they do not meet the definition. The principal consequential changes in the SORP are included in Part 4 Long Term Business, but changes relevant to general insurers include

• scoping out ‘investment contracts’ from the whole of Part 3 of the SORP (General Insurance Business), and a cross reference to paragraph 162 which contains the required accounting treatment
• scoping out ‘investment contracts’ from most of the paragraphs dealing with Reporting the Substance of Reinsurance Transactions in Part 5 (General and Long Term Insurance Business)
• excluding companies subject to FRS 26 from certain requirements in Part 6 (Accounting for Investments).

The other main changes of relevance to general insurance business are

• paragraph 83 requires the annual basis to be used to determine underwriting results; fund accounting is no longer referred to in the SORP and is effectively prohibited
• paragraph 219 on exchange gains and losses no longer includes wording which in the old SORP extended the definition of “foreign enterprise” to “a business operation with foreign currency liabilities which are broadly matched by a holding of foreign currency assets” [2003 SORP, paragraph 197]. This may restrict the ability of companies to take exchanges gains and losses to reserves in some circumstances.

There was an amendment to paragraph 182 of the SORP in December 2006, which only affected long-term business.