GIM2190 - Accounting framework: investment income

Investment income – realised and unrealised gains to Profit and Loss account

The most significant assets on a general insurers balance sheet will be the investments held as backing for the company's outstanding liabilities and to meet regulatory prudential standards (see GIM3120).

The IAD brought more consistency in the treatment of investment income than had previously been the case. Schedule 9A CA 1985 requires investment income (and related expenses) to be taken to the non-technical account. A transfer may be made to the technical account based on the longer-term rate of return, or the actual rate of return. This is strongly encouraged for listed companies but is not a requirement. The notes to the accounts should disclose the methodology used to determine the longer-term rate of return.

Realised gains or losses on investments are treated in the same way as income. As investments must generally be shown at market value in the balance sheet (see below) there will also be unrealised gains or losses each year.

Until the 1998 SORP, these unrealised gains and losses could be carried to a revaluation reserve in the balance sheet or disclosed in the non-technical account. It was only with the publication of the 1998 SORP that it was finally determined that the distinction between realised and unrealised gains and losses on readily marketable products is largely irrelevant. Accordingly all such realised and unrealised gains and losses should be taken to the profit and loss account. See paragraph 285 of the 2005 ABI SORP.

Investment income – ‘mark to market’ basis

Paragraph 22 onwards of Schedule 9A CA85 provides the basic rule that all investments of an insurer are to be shown in the balance sheet at their “current value”. This generally means market value at the balance sheet date. Market value at an earlier date is permitted in the case of land and buildings, provided that they are properly valued at least once every five years and account is taken of any diminution in value since the last valuation. Where an asset has been, or is about to be, sold when the accounts are drawn up the valuation must be reduced by the costs of realisation. In the case of debt securities the market value is, by implication, to be a “clean” value, excluding the value of any accrued interest, since such interest must be shown separately on the face of the balance sheet.

Companies accounting in accordance with FRS 26 will value their investment securities at “bid” rather than “mid” market value.

An alternative treatment is permitted for fixed-income securities by Paragraph 24 of Schedule 9A. Instead of marking these to market a company may amortise the difference between the purchase price and the amount payable on the redemption of the security over the period to the redemption date. The 2005 ABI SORP (paragraph 279) points out that use of the amortised cost basis is appropriate for redeemable fixed income securities held as part of a portfolio of such securities intended to be held on an ongoing basis in the activities of the insurance undertaking. However it is inappropriate for irredeemable fixed interest stocks and accordingly these should be accounted for at current value.