GIM6250 - Technical provisions: periods of account beginning on or after 1 January 2000: General Insurance Reserves (Tax) Regulations: discounting
Regulation 3: Rule 5: discounting
The “liabilities” defined in Rule 3 (the costs of
settling the original provisions as at the recalculation date) are
to be discounted between the balance sheet date and their date of
payment. This period is the “discount period” and
extends for no more than ten years after the original provisions
arose. Liabilities that are settled (including provisions for
claims still outstanding) after the ten-year point will therefore
reflect the cost of settling those liabilities, discounted for ten
years only. For the purposes of the calculation the new provision
made at the recalculation date in respect of any remaining
liabilities is treated as if it was a claim paid on that date.
Other costs of settling liabilities are discounted from the actual
date of payment.
The discount rate to be used is prescribed in the regulations
by reference to the earlier period of account. This means that the
same discount rate will always be used for the recalculation of a
given earlier period. So given that the discount rate for the 2000
period of account was 2.79%, any liabilities of the 2000 period of
account settled on 31 December 2005 would be discounted at 2.79%
for five years. As the discount rate for the 2001 period of account
was 2.742%, any liabilities for that period settled on 31 December
2005 would be discounted at 2.742% for four years.
Rule 5.4 sets out the formulae used in calculating the
discount rates to be applied in the calculations. The sterling
discount rate is set annually and is calculated from 5 year UK
Gilts rates (averaged over five days around the end of the period
of account) less a 2.3% risk margin. Where the calculations are
made in one of six other currencies, a specific discount rate is
used for that currency, based on the LIBOR rate on 12 month
deposits (shown on the BBA website), again less the 2.3% margin.
The rates so far have been
|
Accounting period |
||||
| Currency | 31/12/00 | 31/12/01 | 31/12/02 | 31/12/03 |
| Sterling | 2.79% | 2.742% | 1.944% | 2.4% |
| Euro | 1.68609% | 1.58679% | 0.68950% | 0.26625% |
| US dollar | 2.94109% | 0.67091% | 0% | 0% |
| Canadian dollar | 2.49692% | 0.55258% | 0.90358% | 0.68792% |
| Australian dollar | 2.75109% | 2.61779% | 2.65775% | 3.68125% |
| Swiss franc | 0.34692% | 0.27258% | 0% | 0% |
| Japanese yen | 0% | 0% | 0% | 0% |
|
Accounting period |
|||
| Currency | 31/12/04 | 31/12/05 | 31/12/06 |
| Sterling | 2.186% | 1.86% | 2.734% |
| Euro | 0% | 0.13688% | 1.19088% |
| US dollar | 0.35475% | 2.12875% | 2.520275% |
| Canadian dollar | 0.07808% | 1.32042% | 1.40775% |
| Australian dollar | 2.72725% | 2.99375% | 3.79775% |
| Swiss franc | 0% | 0% | 0% |
| Japanese yen | 0% | 0% | 0% |
A rate that is less than zero is set to zero – Rule
5.4(b).
The discount for each liability should in principle be
computed separately but statistical methods can be used where these
give approximately the same result. For example, it may be
appropriate to assume that all claims are paid exactly half way
through the period, providing this gives approximately the same
result as individual calculations. It would not be appropriate to
assume (unless of course the facts of the case support it) that
liabilities are settled on the first day of the period, as this
would understate the effect of discounting.
The aggregate of the discounted liabilities is known as
“the recalculated provisions” for the earlier period of
account.
