General insurance reserving industry guidelines
Inland Revenue follows the Financial Reporting Standard No 35 (FRS-35) where it is consistent with the income tax legislation.
All section references are to the Income Tax Act 1994 ("the Act") unless otherwise stated.
Unearned premium reserve
- The unearned premium reserve ("UPR") is the portion of gross premium that relates to the cover of risks beyond the insurer's balance date, calculated on a daily basis. Alternative calculation methods may be acceptable where the daily basis is not appropriate.
- Reinsurance premiums should be recognised separately as expenditure when applying the deductibility provisions in the Act and are not required to be netted off against premium income.
- Any unexpired portion of deductible reinsurance premiums at the end of an income year is to be included in gross income as accrual expenditure under section EF 1 of the Act, subject to the exemptions in Determination E 10.
- Acquisition costs should be recognised separately as expenditure when applying the deductibility provisions in the Act and are not required to be netted off against premium income or in calculating the UPR.
- Any unexpired portion of deductible acquisition costs at the end of an income year is to be included in gross income as accrual expenditure under section EF 1, subject to Determination E 10.
Outstanding claims reserve ("OCR")
- An insurer may deduct a reasonable estimate of the outstanding claims incurred and not paid at the end of an income year. This may include those claims incurred but not reported ("IBNR") where the insured event occurred before the end of that income year.
- Policy benefit amounts and direct claim settlement costs are incurred at the time of the insured event, and a reasonable estimate of costs is deductible in that income year.
- Indirect claim settlement costs constitute ongoing business expenses that will be incurred over time whether or not any particular claim is received by an insurer. Indirect claim settlement costs should not be included in the estimation of the insurer's outstanding claims reserve or IBNR.
- Any deductible unexpired portion of direct claims settlement costs at the end of an income year is to be included in gross income as accrual expenditure under section EF 1, subject to any determination of exemption under section EF 1(3) (currently Determination E 10).
- Section EF 1 does not require policy benefit amounts under an insurance policy to be included in gross income as accrual expenditure at year end, whether such amounts are paid directly to the insured or on the insured's behalf, or whether they are paid to third parties providing goods or services to an insured in discharge of the insurer's liability under the policy. However, unexpired expenditure on direct claims settlement costs is required to be adjusted but the unexpired portion of such costs can be estimated.
Section DK 5 Outstanding claims reserve
- Section DK 5 of the Act sets out the valuation method to be adopted for outstanding claims in relation to insurance to which the provisions of the Accident Insurance Act 1998 apply. Section EF 1 does not apply to reserves claimed as a deduction under section DK 5.
Salvages and other recoveries
- Current industry practice is to credit the expected net recovery against claims expenses. At year end the OCR is reduced by the amount of any expected net recovery.
- For tax purposes Inland Revenue considers third party receivables constitute debts subject to the bad debt write-off provisions. Salvages are considered to constitute trading stock. However, Inland Revenue accepts that the derivation of any gross income, bad debts written off and the value of any trading stock are effected through the claim process with adjustments to the OCR and therefore does not require them to be separately reported, provided movements in these items within the OCR are adequately recorded.
- Section EF 1 does not apply to the costs associated with salvages and recoveries.