GIM6200 - Technical provisions: periods of account beginning on or after 1 January 2000: General Insurance Reserves (Tax) Regulations: overview of the calculation

Regulation 3 sets out the detailed machinery, in the form of ten rules, by which it is determined whether or not a technical provision is excessive or insufficient, and for the calculation of the amount of “interest” to be added to or deducted from profits. The core proposition of the rules is a comparison of:

• the “original provisions”, that is the provisions for liabilities arising in a period as at the “balance sheet date” for each “earlier period of account” beginning on or after 31 December 2000, and
• the discounted value of the “cost” of settling those provisions at a “recalculation date”. This date is the end of a “later period of account” ending on or after 31 December 2001. The cost of settling includes claims paid in the “later period” and the provision established as at the recalculation date in respect of the original provisions not yet settled.

The recalculation of the “original provisions” relates to provisions which are “taken into account”. This means taken into account for tax purposes, that is, those for which the insurer had a tax deduction (and so takes account of a FA00/S107 (4) election).

The difference between the two figures, subject to a “margin for error” represents the cumulative excess or deficiency for the later period. This is adjusted for amounts accruing for previous later periods.

Thus, for an insurer in business before the introduction of the legislation and with accounts drawn up to 31 December each year, the first earlier period of account to which the rules apply is that ending on 31 December 2000. The technical provisions in the accounts for this period, and for which it had a tax deduction, are recalculated as at 31 December 2001, 31 December 2002 and so on, until the liabilities of the period ending 31 December 2000 have been run off. Note that the first “earlier period” for any company already in business differs from later “earlier periods”. This is because the “original provisions” for a period ending on 31 December 2000 include not only the provisions relating to liabilities first arising in that period, but also provisions as at that date for liabilities first arising in earlier years. In subsequent “earlier periods” only the provisions for liabilities arising in the period are “original provisions”.

Regulation 5 of SI2003/2862 modified Rules 2 and 8 of Regulation 3 to remove the “ten year rule” which was a feature of the original regulations. The interaction between various aspects of the original rule would have led to some spurious and unintended results when the ten-year point was reached. In order to prevent these spurious results, the “ten year roll up” feature of the regulations was removed in the 2003 amendments.

As a consequence, insurers will need to carry out the calculations required by the regulations in essentially the same way after the ten-year point as before it. They will need to keep records of liabilities according to year of origin, even if this year is more than ten years before the recalculation date. The ABI has advised that there may be difficulties in complying with this requirement. The Revenue has, therefore, undertaken to reconsider the application of the rules to liabilities that are more than ten years old, before 2010 when the first recalculation of ten-year-old liabilities will be required.