GIM6090 - Technical provisions: accounting periods beginning before 1 January 2000: accounting practice

The Insurance Accounts Directive (IAD) approach to the setting of insurance reserves is embodied in paragraph 43 of Schedule 9A CA 1985 which states:

‘The amount of technical provisions must at all times be sufficient to cover any liabilities arising out of insurance contracts as far as can be reasonably foreseen.’

Accounting practice has reflected this since the ABI SORP of 1990. The 2005 SORP states at paragraph 95:

‘The level of claims provisions should be set such that no adverse run-off deviation is envisaged…In setting the provision, consideration should be given to the probability and magnitude of future experience being more adverse than assumed. Where there is considerable uncertainty concerning future events a degree of caution will be necessary in the exercise of the judgement required for setting provisions such that liabilities are not understated.’

When this was first enacted, there were differing views within the insurance industry as to whether this implied that the provision for outstanding claims needed to include a margin over and above the best estimate that can be made of the value of the claims, to allow for the possibility of an adverse deviation from the expected outcome. Whatever the technicalities of the argument, however, the essential point was that in accordance with the IAD, technical provisions of insurers were generally made on more prudential basis than was the case in other businesses.

FRS 12 does not apply to the technical provisions made by insurers, but see paragraphs 238 to 247 of the SORP on the application of FRS 18 and FRS 12 to “Estimation Techniques, Uncertainty and Contingent Liabilities”.