GIM6430 - Technical provisions: periods of account beginning on or after 1 January 2000: General Insurance Reserves (Tax) Regulations: funded accounting

FA00/S107 applies to general insurers using funded accounting in the same way as it does for other general insurers. The technical provisions are compared with the discounted actual cost of settling those provisions. The only complication is in ensuring that claims are assigned to the correct period.

Under three-year funded accounting, for example, the profits shown when the fund closes at the end of year 3 are taxed in year 1. The correct figure for the technical provision at the end of year 1 is the figure shown as the “provision for unpaid claims” at the end of year 3, PLUS the claims actually paid in years 2 and 3. This is because at the end of year 1 those claims had not actually been paid. This figure is the starting point for the section 107 calculations.

The same principle applies in all later years until the liabilities are settled. Any profit crystallising in year 4 is assessed as a profit for year 2. For section 107 purposes, the provision at the end of year 4, PLUS the claims actually paid in years 3 and 4, forms the technical provision for year 2. This is the figure to be compared with the technical provision at the end of year 1. The section 107 calculation then proceeds with the comparison of the discounted provision for year 2 AND the discounted cost of claims paid in year 2. If this is less than the starting provision for year 1 (subject to the 5% margin), we apply an interest charge to the excess and add this to the profits for year 2.