GIM6440 - Technical provisions: periods of account beginning on or after 1 January 2000: General Insurance Reserves (Tax) Regulations: funded accounting: example

For calendar year 2000, a company receives premium income of £1000 and pays out claims and adjusts the fund as follows. This example uses a three-year fund which runs off over 7 years. The example shows only the profits of a single year. In practice the accounts will show the profit of a number of years and the figures will need to be separated out for tax purposes to give profits or losses of each year.

For tax purposes other than FA00/S107, the fund closes in 2002 and profits of £150 are taxed as profits of 2000. This figure is substituted for the estimate made at the time the 2000 return was submitted. The profit of £75 in 2003 is taxed as a profit of 2001; the profit of £50 in 2004 is taxed as a profit of 2002; and so on.

For FA00/S107 purposes, no calculations are made in 2000 or 2001. In 2002 the claims paid in 2001 and 2002 (£150 and £100 respectively) are added to the provision of £400 at the end of 2002 and the resulting figure of £650 is the figure of “original provisions” for the 2000 period of account. This is the starting point for the regulation 3 calculations in later periods of account. Any part of this can be disclaimed under FA00/S107 (4), and it can be disclaimed at any time from the end of 2001 onwards.

In 2003, the discounted values of the claims of 2002 and 2003 (£100 and £75) are added to the discounted value of the provision of £250 at the end of 2003. The sum of this (£425) gives the new provision for claims outstanding for the liabilities of 2000. The discount rate applied is that of the 2000 period of account (2.79%), and the discounted closing provision is £413. Together with the discounted value of claims paid in 2001 of £150 (£148 assuming mid year payment), this is the cost of settling liabilities of 2000 at the end of the later period of account (2001). The regulation 3 calculation requires a comparison of this with the original provisions of £650 to give the difference, which (subject to the 5% margin) is multiplied by the appropriate interest rate (and x 70%) to give an addition to the profits of 2001.

The rest of the calculations proceed on the same basis. At the end of 2004, the discounted value of the claims of 2003 and 2004 (£75 and £50 respectively), are added to the discounted value of the provision made at the end of 2004 (£150) to give the new provision for the liabilities of 2000. Together with the discounted value of the claims paid in 2002 (£100) this is compared with the original provisions of £650, to give the addition to profits in 2002. The last period for which a section 107 calculation is made is 2006, in respect of the claims paid in that year.

The following table summarises the section 107 adjustments for the period of account ending 31 December 2000, in each later period of account.

*The adjusted provision is the sum of the following:

** Claims paid are the actual amounts paid in each period of account.