GIM2090 - Accounting framework: annual accounting: general

Paragraph 23 of the 2005 SORP provides a definition of annual basis of accounting as:

‘A basis of accounting for general insurance business whereby a result is determined at the end of the accounting period reflecting the profit or loss from providing insurance cover during that period (including the anticipation of losses arising on cover to be provided in subsequent periods in respect of commitments entered into prior to the end of the accounting period) and any adjustments to the profit or loss of providing insurance cover during earlier accounting periods.’

Under the annual basis of accounting, premiums earned during the period are compared with claims incurred in that period. Premiums are regarded as earned over the period for which cover is provided, and claims are incurred in a particular period if the event that gave rise to them occurred in that period. So if an insurer makes up its accounts to 31 December, and enters into a twelve-month contract to insure a car on 1 September 2002, one third of the premium will be earned in 2002. This will be compared in the 2002 accounts with the cost of any claims made and estimated to be made (see IBNR at GIM2160) in relation to accidents or other incidents occurring between 1 September and 31 December 2002.

The profit or loss from providing cover during an accounting period is arrived at through the creation of an unearned premiums provision (UPP, often still referred to as UPR – unearned premiums reserve), the deferral of acquisition costs, and the creation of an unexpired risks provision (URP, often still referred to as URR – unexpired risks reserve).