GIM2150 - Accounting framework: funded accounting: open and closed years

In funded accounting, the balance of profit on the business of an underwriting year is not struck at the end of that year. Premiums and expenses are recorded in the current year accounts together with any notified claims. The balance is carried forward as a “fund” for one or more years until the underwriting year is “closed”. Funded accounting uses the underwriting year basis, the conceptual foundation of which is that an insurer has done all that it needs to do to earn a profit from a contract as soon as it enters into it. The comparison is then between the total premiums receivable and claims payable on contracts entered into (or “incepting”) during the year.

The whole of the premium income arising on all policies written in, say, 2000 will be treated as income for the year to 31 December 2000, and there will not be a calculation of an unearned premium reserve at 31 December 2000. Similarly, all claims arising on that policy will be treated as referable to 2000. Therefore, if an event giving rise to a claim occurs in July 2001 on a policy written in September 2000, the cost of that claim will also be related back to the 2000 underwriting year.

A year is “closed” by striking a balance of profit that includes a provision for all outstanding claims relating to policies incepting in the underwriting year. Where appropriate, provisions for unearned premiums and unexpired risks should be created in accordance with annual accounting principle.

Anticipated losses for open years will be recognised in the financial statements as soon as it appears these will arise. The underwriting result disclosed in the financial statements prepared on a fund basis will, therefore, comprise the result for the underwriting year closed at the end of the accounting period and adjustments to provisions previously established for open years. In addition the accounts will include adjustments to the expected outcome for previously closed years.