GIM4150 - Taxation of general insurance: funded accounting: an example
The example at GIM2210 had the following technical account:
Marine insurance Co Ltd – accounts to 31/12/00
| Technical Account | £m |
| Income |
|
| Fund @ 1.1.00 | 17 |
| Reinsurance recoveries | 22 |
| Premiums | 53 |
|
|
|
| Expenses |
|
| Reinsurance premiums | (26) |
| Claims | (42) |
| Expenses | (5) |
| Fund @ 31.12.00 | (16) |
|
|
|
| Underwriting result | 3 |
The accounts for year ended 31/12/00 allow the results for the year ended 31/12/98 to be finalised for tax purposes as this is 3 year business. The example analysed the 2000 results as follows:
|
|
Total |
1998 and earlier |
1999 |
2000 |
|
|
£m |
£m |
£m |
£m |
| Income |
|
|
|
|
| Fund @ 1.1.00 | 17 | 12 | 5 |
|
| Reinsurance Recoveries | 22 | 15 | 5 | 2 |
| Premiums | 53 | (2) | 5 | 50 |
| Expenses |
|
|
|
|
| Reinsurance Premiums | (26) | (1) | (1) | (24) |
| Claims | (42) | (15) | (8) | (19) |
| Expenses | (5) | (1) | (1) | (3) |
| Fund @ 31.12.00 | (16) | (5) | (4) | (7) |
| Underwriting Result |
3 | 3 | 1 | (1) |
The result of the 1998 business reflected in the accounts to 31 December 2000 on the closure of the fund is therefore £3m. This final result will itself be the amalgamation of three years’ development, which will have been shown in three separate sets of accounts for 1998, 1999 and 2000. This can be seen in the table below.
| Results of 1998 funded business in:- |
1998 a/cs |
1999 a/cs |
2000 a/cs |
Total |
|
|
|
|
| |
| Income |
|
|
|
|
| Fund b/f |
| 13 | 12 |
|
| Reinsurance Recoveries | 3 | 4 | 15 | 22 |
| Premiums | 49 | 7 | (2) | 54 |
| Expenses |
|
|
|
|
| Reinsurance Premiums | (27) | (2) | (1) | (30) |
| Claims | (8) | (8) | (15) | (31) |
| Expenses | (4) | (1) | (1) | (6) |
| Fund c/f* | (13) | (12) | (5) | (5) |
| Underwriting result for 1998 | 0 | 1 | 3 | 4 |
Fund c/fwd at 31 December 2000 is the closing provision for 1998
business, and may include equalisation reserves.
The computations for the accounting period ended 31 December
2000 in this example will therefore show the disallowance of
the underwriting profit per the accounts, and the add-back of an
aggregated figure for the 1998 underwriting year. Where is it
necessary check figures against the FSA return, reference
will need to be made to forms 24, 25, 28, and 29 (see
GIM3200). It will be
necessary to aggregate the figures on several forms to arrive at
the total reflected in the accounts. The fund for an open
year of account will appear in line 20 on form 25. The
provision for a closed year account will appear at line
29. The final result for 1998 would therefore combine the
“open year” figures for premiums, claims, and expenses
from forms 24/25 from the 1998 and 1999 returns, together with the
closed year figures for 1998 (and all earlier years) from the 2000
return. The closing figure for the technical provisions
would be that appropriate to 1998 (and earlier years) as shown in
the 2000 return.
Line 19 on form 25 may be used in an “open” year
where there is an anticipated loss for a year in one class of
business accounted for on a funded basis, and an anticipated
surplus in another. Such anticipated profits and losses
may, in certain circumstances, be offset against one
another. They have no effect on the tax computation,
and, generally, Inspectors should ensure that where losses have
been anticipated for an open year, these are not allowed in the tax
computation for the closed year.
Funded business is frequently written in currencies other
than sterling, and exchange differences can be significant.
The basic rules for currency accounting described in
GIM4130 apply to funded accounting in the
same way as they apply to annual accounting. If profits or
losses are recalculated when the fund is replaced, they will be
translated using rates prevailing for the underwriting year, and
not any later period.
