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Appropriate Amount of Technical Reserves

Following the repeal of rules dealing with the tax treatment of general insurers’ reserves, FA 2007 allowed the amount of the technical provisions stated in the accounts in the computation for tax purposes of the profits of the general insurer’s trade unless that amount exceeded the “appropriate amount”. However the concept of “appropriate amount” was not defined by statute, pending work on secondary legislation in consultation with the industry.

The regulations have now been laid, to come into force on 1 September 2009.

In relation to a general insurer, other than a member of a Lloyd's syndicate, they will have effect for periods of account ending on or after 31 December 2009. In relation to a member of a Lloyd's syndicate, they will apply to syndicate returns made in respect of profits and losses declared after 31 December 2009.

The regulations recognise the fact that under modern accounting standards technical provisions have become considerably more scientific.

The appropriate amount will be the aggregate of the following provisions (including the member’s share of those provisions for open Lloyd's syndicates):-

  1. Provisions for unearned premiums and unexpired risks determined in accordance with the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Accounts and Reports Regulations”)
  2. Claims outstanding provisions (including expenses of handling future claims), subject to a number of conditions. If these are not met, the claims outstanding amount is the general insurer’s undiscounted best estimate of the future cashflows in respect of claims outstanding.

In the case of a closed Lloyd's syndicate, the appropriate amount is the reinsurance to close premium or the member’s share of the above provisions calculated on an open syndicate basis if it produces a lower amount.

Conditions for claims outstanding provision

The written confirmation condition

The general insurer or syndicate must give confirmation in writing, normally when submitting the company’s tax return, that

  • the amount of the liabilities stated in the accounts is not excessive AND
  • the confirmation is founded on or supported by an opinion in writing given to the general insurer by an actuary or other suitably skilled person (which may include a director or employee of the general insurer) that the amount is not an excessive estimate.

The opinion must reflect the circumstances prevailing at the time when the technical provisions are adopted, being the time when directors approve the annual accounts of the general insurer.

The calculation condition

The provisions calculated must be:-

  • in accordance with the Board of Actuarial Standards (or equivalent for overseas resident insurers)
  • in line with the nature or type of risks to which the liabilities in respect of claims outstanding relate, and the volatility and uncertainty associated with those risks.
  • net of reinsurance ceded
  • in accordance with the Accounts and Reports regulations

National contacts

Howard Jones

Howard Jones

Partner
+44 (0)20 7063 4297 or +44 (0) 7794 031 167

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Carine Beidas

Senior Manager, Financial Services Tax
+44 (0)20 7063 4311

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