LAM01100 - Introduction and long-term insurance business overview: life company accounting: basic overview

Life companies produce financial information both for regulatory solvency purposes as well as for financial reporting purposes. Until 31 December 2012, trade profits reported in tax returns were based on the insurance regulatory returns for life companies. From 1 January 2013 onwards, trade profits are based on accounting profits.

Understanding the accounts and making use of the information in published financial statements is important as the accounts feed directly into taxable profits and information disclosed is helpful in considering the tax return. There are important differences between life insurance company accounts and other sets of accounts. The impact of accounting on the tax computation is explored in more detail within each relevant chapter.

For insurance groups listed in the EU and certain other jurisdictions the consolidated accounts must be prepared using International Financial Reporting Standards (IFRS). The individual entity accounts for UK insurance companies that are used for tax purposes may report under one of three bases:

  • IFRS
  • UK GAAP – FRS 101 (essentially IFRS recognition and measurement requirements but with reduced disclosures and presented in the format required by the Companies Act)
  • UK GAAP – FRSs 102 and 103 (again, presented in the format required by the Companies Act). FRS 103 Insurance Contracts has been effective from 1 January 2015 onwards and was updated in May 2016 for the impact of Solvency II. The standard includes definitions of insurance contract and insurance risk, and consolidates financial reporting requirements for insurance contracts from both IFRS and previous UK GAAP

For UK branches of non-UK insurance companies the entity accounts may be prepared under IFRS or the relevant GAAP for the entity’s territory of incorporation.

The provisions of the European Insurance Accounts Directive were implemented in the UK by the Companies Act 1985 but are now found in Schedule 3 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI2008/410) (the ‘Accounting Regulations’) made under the Companies Act 2006.

The Accounting Regulations lay down the required formats for the balance sheet and income statement (profit and loss account) for UK GAAP.

The main features to be aware of when reviewing an insurance company’s accounts include:

  • For UK GAAP only, the income statement is divided into the ‘technical’ and ‘non-technical’ accounts. The distinction is not precise but broadly the technical account presents the results of the long-term insurance business and the non-technical account includes other income and expenses
  • For UK GAAP and IFRS
    • deferred acquisition expenses are often a material item in the accounts due to the long-term nature of the policies
    • certain policies, such as unit-linked bonds, are not regarded as insurance for accounts purposes; these are treated as ‘investment contracts’ with premiums from customers generally held on balance sheet as policyholder deposits and only the fees charged within the policy treated as income.
    • technical provisions for insurance liabilities may differ between the accounts and insurance regulatory calculations. The established basis of accounting for long-term business in the UK which has generally been applied is the Modified Statutory Solvency Basis (MSSB). This essentially represents the provisions made for regulatory purposes prior to Solvency II (the SSB), modified by certain adjustments for accounting purposes. However, insurers are permitted to make the financial reporting more relevant without adversely affecting reliability, or more reliable without adversely affecting relevance. While the MSSB may still be the foundation it therefore does not necessarily function as a consistent requirement

UK GAAP companies that have with-profits funds will have a ‘Fund for Future Appropriations’ (FFA) on the balance sheet, representing the surplus in the fund that has not yet been allocated between policyholders and shareholders. For IFRS, instead of an FFA, there may be an ‘Unallocated Divisible Surplus’ (UDS). This may be separately disclosed on the face of the balance sheet or presented within liabilities and separately disclosed in a note to the accounts.

In IFRS the accounting standard that addresses insurance accounting is IFRS 4 Insurance Contracts. Significantly, IFRS 4 generally permits insurers to continue to use the accounting policies approved in their home state. This means that broadly the basis of accounting is often the same or similar to that applied under UK GAAP with the main differences as highlighted above.

In 2017 the International Accounting Standards Board issued a new accounting standard for insurance contracts: IFRS 17. This was the culmination of a long running project to introduce a comprehensive new accounting model for insurance contracts, covering recognition, measurement, presentation and disclosures. IFRS 17 will lead to significant changes in accounting for insurance contracts. The mandatory effective date was initially 1 January 2021 but has been put back to at least 2022.

With the introduction of Solvency II in 2016, the regulatory returns for 2016 are in a new format – the Solvency & Financial Condition Report ‘SFCR’. Life companies used to be required to submit their regulatory returns with the form CT600 but this practice has been largely discontinued. Companies may be asked for a copy of their annual SFCR, which is public information, as part of any risk assessment process.