GIM2050 - Accounting framework: Association of British Insurers: Statements of Recommended Practice 1990, 1998, 2003 and 2005
The key changes between the ABI SORPs of 1990 and 1998 were as follows:
- Annual accounting (see GIM2090) became the recommended accounting treatment for all kinds of insurance business, deferred annual accounting was outlawed, and the funded basis became acceptable for 2, 3 or 4 year funds: only in restricted circumstances.
- The revenue account became 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 addressed, including those relating to the fair value of claims provisions on acquisition (FRS 7), reporting the financial performance of business in run-off (FRS 3), and reporting the substance of general insurance and reinsurance contracts (FRS 5).
- The treatment of accounting for investments (see GIM2190), equalisation reserves, IAD rules on discounting of claims reserves and guarantee levies were addressed.
In November 2003 the ABI issued a revised SORP, which applied to accounting periods beginning on or after 1 January 2004. It contained updated guidance on the relationship between generally accepted accounting practice (GAAP), the requirements of company law and regulatory rules. The key differences between the 2003 SORP and the 1998 SORP were as follows:
- The annual basis of accounting (see GIM2090) became the only acceptable basis for reporting underwriting results, except for Lloyd’s corporate capital vehicles, which could continue to use their modified version of the funded basis where information about premiums and claims was considered not reliable enough, continuing Lloyd’s tradition of three-year accounting.
- The application of Financial Reporting Standards issued since 1998 was addressed, notably FRS 15 (Tangible Fixed Assets), FRS 17 (Retirement Benefits), FRS 18 (Accounting Policies, including estimation techniques and uncertainty) and FRS 19 (Deferred Tax).
- Accounting for deferred tax arising from the application of FA00/S107 was addressed. (FA00/S107 was repealed by FA07/SCH11.)
- Reinsurance transactions were addressed so as 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, through applying some of the FRS 12 disclosure requirements to insurers’ contracts with policyholders even though FRS 12 (Provisions, Contingent Liabilities and Contingent Assets) does not apply to insurance contracts.
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 (Financial Instruments: Recognition and Measurement) and FRS 27 (Life Assurance). Although FRS 27 has no impact upon general insurance business, FRS 26 may apply to the accounts of those general insurers which elect to use a fair value basis of accounting for derivatives.
FRS 26 applies to listed companies not using IAS from 1 January 2005 and to other companies from 1 January 2006, and voluntarily for 2005, if companies take advantage of the option to use the fair value accounting method for derivatives. There is a new definition of insurance contract and the requirement for contracts to be accounted for as investment contracts if they fall outside the definition.
The main consequential changes in the SORP affect Long Term Business (Part 4 of the SORP), but those of general insurance interest include
- excluding investment contracts from Part 3 (General Insurance Business) of the SORP, adding a reference to paragraph 162 which contains the required accounting treatment
- excluding investment contracts from most of the paragraphs dealing with FRS 5 (reinsurance) 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
- requiring the annual basis to be used to determine underwriting results; funded accounting is no longer referred to in the SORP and is effectively prohibited (paragraph 83)
- excluding from paragraph 219 (exchange gains and losses) wording in the old SORP at paragraph 197 which extended the definition of foreign enterprise to include a business operation with foreign currency liabilities which are broadly matched by a holding of foreign currency assets: this may restrict the ability of companies to take exchange gains and losses to reserves in some circumstances.
There was a further amendment to paragraph 182 of the SORP in December 2006, but this affected long-term business only.