My Basket0

Insurance accounting (general business)


Publication date:

01 May 2014

Last updated:

28 October 2018


Ian Hutchinson, Alex Barnes

In the UK, quoted insurance companies have to prepare their consolidated accounts in accordance with International Financial Reporting Standards (IFRS). Other companies have the choice of either using IFRS or UK Generally Accepted Accounting Principles (UK GAAP). The insurance accounting standards are in the midst of significant change.  


Updated by Alex Barnes December 2016.


  • Summary »
  • Accounting framework »
    • Accounting standards
    • Filing requirements and accessibility
    • Audit requirements
    • Quoted company requirements
    • Lloyd's Syndicates
    • Users of accounts


In the UK, quoted insurance companies have to prepare their consolidated accounts in accordance with International Financial Reporting Standards (IFRS). Other companies have the choice of either using IFRS or UK Generally Accepted Accounting Principles (UK GAAP).

The insurance accounting standards are in the midst of significant change. 

This last year insurance companies preparing their accounts under UK GAAP have had to move from old UK GAAP to new UK GAAP, FRS 102 and FRS 103 in particular. These new UK accounting standards have brought UK GAAP much closer in line with IFRS, and give more transparency in a variety of ways to users of accounts. In particular there is greater disclosure of claims development and the nature and extent of credit risk, liquidity risk and market risk.

In addition, from 1 January 2016, insurance companies have had to implement Solvency II including new reporting requirements. Solvency II has its own balance sheet recognition principles and reporting requirements that insurance companies have had to implement. This has resulted in a need for a great deal of investment and training in the new requirements.  For users of accounts and regulatory reporting, it means there is an unprecedented amount of information that can be obtained on insurance companies.

IFRS is also going through significant change. In 2021 insurance companies will need to implement IFRS 17, which will represent a fundamental change to the recognition basis for insurance accounts.

Accounting framework

Accounting standards

In the UK, insurance companies have to prepare accounts that either comply with:

  • UK Generally Accepted Accounting Principles (UK GAAP); or
  • International Financial Reporting Standards (IFRS).

All companies whose shares are quoted on a main stock exchange have to prepare their consolidated financial statements in accordance with IFRS. Other companies, including the subsidiaries of quoted companies, are allowed to use either UK GAAP or IFRS. UK companies also have to comply with the Companies Act 2006, which sets the overriding requirement that accounts have to "give a true and fair view of the assets, liabilities, financial position and profit or loss …"

The "true and fair" principle is important: directors of a company have a responsibility to prepare financial statements that are true and fair. If, by following an accounting standard such as UK GAAP or IFRS, the accounts do not show a true and fair view then the directors must adopt an accounting policy that does show a true and fair view and explain why they have departed from the guidance given by the standard. It is rare for directors to have to adopt a true and fair override - but it does happen.

Development of New UK GAAP

For all financial years commencing on or after 1 January 2015, companies preparing their accounts under UK GAAP have had to move from an old UK GAAP structure to a new set of standards. The standards particularly relevant to insurance companies are FRS 102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland) and FRS 103 (Insurance Contracts).

These new standards move disclosures much closer to IFRS. FRS 103 is virtually identical to IFRS 4. As a result, in the last year we have seen the level of disclosure provided in insurance companies' financial statements grow considerably. 


IFRS 4 - Insurance Contracts is the current IFRS that must be applied by insurance companies. This standard defines an insurance contract and gives guidance on presentation and disclosure requirements. However, it is an interim standard that permits a wide variety of previous accounting practices for insurance contracts to continue until phase II of the accounting project is complete (See  Looking ahead, below).

One consequence of this is that insurance companies that use IFRS currently can have differing ways of accounting for their insurance contracts. This can make comparability between one company and another difficult. Indeed, in some insurance groups there can be differing practices between their insurance subsidiaries.

Filing requirements and accessibility

In the UK, companies are registered at Companies House and have a requirement to file their accounts with Companies House each year. These accounts are available to the public. Public companies (those with PLC in their name) must have their accounts filed within six months of their year end, while others have nine months to file their accounts. It should be noted that not all countries require accounts to be in the public domain - for instance, the USA does not have an equivalent requirement.

Audit requirements

The Companies Act sets out which companies are required to have an audit. Some categories of company are exempt from the audit requirement, such as small companies (for threshold limits, see the GOV.UK website). However, insurance companies, banks and some other companies of public interest always have to have an audit. The rules are set out in sections 477 to 483 of the Companies Act 2006.

In the UK auditors are required to follow International Standards on Auditing (UK & Ireland).Generally the auditing standards across the world are moving to towards International Standards on Auditing.

The auditors' objective is to assess whether the financial statements provide a true and fair view of the position and performance of the business in the year. To come to this conclusion the auditors are required to design and implement an appropriate audit strategy to be able to gain comfort on both the numbers presented and the narrative provided in the financial statements.

Quoted company requirements

Quoted companies have a number of additional requirements. For instance, they have to produce abbreviated half-yearly accounts (interim accounts). UK companies listed in other countries will have additional requirements. For instance, those with a listing in the USA will have to comply with the Sarbanes Oxley rules, one of which is to report on the adequacy of the company's internal controls.

Lloyd's Syndicates

Lloyd's Syndicates also  have a number of additional requirements. They are required to complete financial reporting forms which Lloyd's can then use for the Society of Lloyd's of London's own accounts, and to help Lloyd's oversight of the Syndicates. These are prepared quarterly, and for 31 December require an audit and for 30 June require a review by an auditor. 

Users of accounts

There is a diverse range of potential users of accounts including investors, analysts, rating agencies, regulators, insureds, brokers, HMRC, creditors, banks and others who have provided loans, competitors and employees.
Some, such as significant investors, analysts and rating agencies may look at the accounts in detail. Others that are particularly interested in the financial strength of an insurance company may rely on rating agency assessments rather than review the statutory accounts.

Structure of the accounts


Overall financial statements are designed to provide the users with both narrative and numerical information on the performance of the company in the year, its position at the year end, its principle risks, and also information on any relevant significant events that may have occurred between the year end and the date on which the accounts were signed.

Directors' report and Strategic report

The Companies Act 2006 requires insurance companies to have a Directors report and a Strategic report. Together these provide an essential narrative on what the company does, it's plans for the future, how it has performed in the year, and what its risks and objectives are.

The requirements are for the Strategic Report to:

  • Provide a fair review of the company's business and a description of the principal risks that it faces;
  • Provide a balanced and comprehensive assessment of the business;
  • Allow readers to understand the developments, performance and position of the business; and
  • Include relevant key performance indicators.

The Directors Report should provide information on:

  • Directors holding office in the year;
  • Dividends recommended;
  • The financial risk management objectives of the organisation;
  • Exposure to price, credit and liquidity cashflow risks;
  • Details of post balance sheet events;
  • Likely future developments;
  • Research and development activity;
  • Indication of branch offices outside the UK; and
  • Information on hiring, training and employment of staff.

Audit report

Currently you will find that most insurance companies, except quoted companies and friendly societies, will have standardised audit reports. These set out the objectives of the audit and the overall option of the auditor on the financial statements.

Going forward, following the implementation of the EU Audit Directive, all insurance companies will have more detailed audit reports. These will include details on the significant audit risks that the audit team assessed, the outcome of this work, the extent to which the audit was capable of detecting irregularities including fraud as well as the audit partner's opinion on the financial statements.

It is intended that the new style audit reports will be more useful and provide more information for the users of the accounts.

Statement of Comprehensive Income - also known as "Income and Expenditure Account" or "Profit and Loss Account"

This sets out the income that company has earned in the year, the expenditure that the company has incurred and the resulting profit or loss. In the case of insurance companies sources of income will primarily be premiums earned, investment returns and reinsurance recoveries received. The primary forms of expenditure will be claims incurred, reinsurance premiums paid, operating expenditure and any losses on investments.

If you are in any doubt about what a term means in a set of accounts, have a look at the accounting policies note for an explanation. Typical abbreviated meanings are shown below:

  • Gross written premium - gross of reinsurance and commission. Normally shown excluding insurance premium tax.
  • Net written premium - net of reinsurance but still gross of commission.
  • Net earned premium - premium earned in the accounting period net of reinsurance. For example, if a risk commences on 1 October with a premium of £1,200 (net of insurance premium tax) the gross written premium in the period to 31 December is £1,200 and the earned premium is £300. The balance of £900 is unearned at 31 December and shown in the balance sheet - see the section below on balance sheet items.
  • Net incurred claims - This is the sum of the claims provisions at the end of the period, plus claims paid during the period less the claims provisions at the start of the period.
  • Underwriting profit - This is not always shown but, where it is, it generally represents the result of premiums less claims less expenses. It generally excludes investment income, but may include investment income earned on the assets supporting the unearned premium and outstanding claims. It sometimes excludes head office expenses.

Statement of Financial Position - Also known as "Balance Sheet"

The Statement of Financial Position shows the value of the company's assets and liabilities at the year end. The difference between the value of the assets and liabilities will be the net assets or liabilities. Naturally for insurance companies to be able to underwrite is essential that they have sufficient net assets to continue to take on insurance business. So you will only rarely see an insurance company with net liabilities.

The following items will be found on an insurance company's balance sheet:

  • Provision for outstanding claims. This is a provision for the claims that the company had incurred at the year end. It is normally the most uncertain element of an insurance company's accounts. The provision is made up of:
  • Case estimates -  The estimates that claims handlers have put on claims outstanding at the year end.  The accuracy of this number will depend on the judgement applied by the claims handlers, the certainty of the individual claims, the adequacy on the information provided to the claims handlers and volatility in any underlying exchange rates.
  • Claims Incurred but not reported  (IBNR) -This a provision for the estimated cost of claims incurred before the balance sheet date but not reported to the insurance company, together with an estimate of any potential increase or decrease in the cost of claims that may develop adversely (also referred to as IBNER - incurred but not enough reported). IBNR is normally estimated by an insurance company's actuarial team. The actuaries will use various statistical techniques, assumptions and data sets to model an insurance company's claims. The accuracy of this estimate will depend on the availability of appropriate claims data, the predictability of the type of claims and application of appropriate assumptions and models by the actuaries. In some cases claims exposure can be highly unpredictable, is which case the accounts should explain this unpredictability.

This provision is normally shown gross of reinsurance with a corresponding asset on the balance sheet being the outstanding claims attributable to reinsurers. The provision is normally shown on an undiscounted basis which means that is the value is set to allow for future inflation up the time that the claim is expected to settle. For certain classes of business, the claims provision is on a discounted basis. This means that the claim provision has been reduced to take account of investment income that may be earned up the expected date of settlement.

  • Reinsurance recoveries. Assuming an insurance company is protected by outward reinsurance, the balance sheet would include the reinsurers' share of outstanding claims as an asset. This number is affected by the same unpredictability as the claims liability, The actuaries will factor in an insurance company's reinsurance programme when modelling its claims exposure and reinsurance recoveries.
  • Unearned premium. This is the portion of premiums written during the previous period that are unearned at the balance sheet date. In the example shown in 'net earned premium', above, the unearned portion is £900.
  • Unexpired risk reserve. An unexpired risk reserve is only required if the expected future cost of claims attributable to unearned premiums exceeds the value of unearned premiums. Obviously this is likely to happen on loss-making lines of business. Deficits that may arise on certain lines of business can normally be offset against surpluses on other lines that are managed together. Generally, a fairly broad definition of managed together is taken and, as a result, it is unusual to see an unexpired risk reserve in a set of accounts.
  • Technical provisions. The outstanding claims, unearned premium and unexpired risk reserve together are referred to as the technical provisions.
  • Deferred acquisition costs. Acquisition costs include commission paid to intermediaries and internal costs of writing business such as underwriting costs. In some cases they will only be incremental costs and in other cases an element of fixed overhead costs may be added to acquisition costs. In the same way that a portion of premium is deferred and included in unearned premium, an equivalent portion of acquisition costs is deferred and included in deferred acquisition costs.
  • Reinsurers share of unearned premiums. Unearned premiums will be reduced by an reinsurers' share of unearned premiums. 
  • Shareholder funds. Shareholders' funds, also referred to as equity, include share capital issued to investors and reserves such as accumulated profits.

Other primary statements

Statement of cash flows - Also known as "Cashflow statement"

The financial statements will include a cashflow statement. This shows the cash inflows and outflows that the company experienced in a year. It is shown in a format defined by the accounting standards.

An insurance company normally receives premiums in advance of having to pay claims. This means that as an insurance company grows, its cashflow increases. This is unusual as most businesses need to borrow money to finance their growth. Some commentators would say that this means the cashflow statement has little meaning for an insurance company.

Liquidity is important to an insurance company as funds may need to be made available at short notice to finance large catastrophe claims payments. The amount of funds available to an insurance company at short notice from the sale of liquid investments or from borrowing facilities needs to be kept constantly under review. So, although it may be true that a cashflow statement for any one particular year may not add much to the understanding of the finances of an insurance company, having funds available at short notice is important and funding facilities are should disclosed in the notes to the accounts (look under liquidity risk).

Statement of changes in equity - Also known as "Statement of changes in reserves"

This will show any changes an insurance company's reserves other than those that are shown the statement of comprehensive income. Such movements may include dividend payment, capital contributions, prior year adjustments or adjustments for hedge accounting.

Notes to the accounts


The notes to the accounts provide detail and explanations supporting the numbers shown in the primary statements (balance sheet, profit and loss account, cashflow statement, and statement of changes in reserves).

Readers of the accounts will generally have seen that the volume of disclosure in the notes of most insurance companies' accounts have grown in recent years due to evolving UK GAAP and IFRS requirements. This section intends to identify some particularly useful areas of an insurance company's notes.

Claims development tables

IFRS and new UK GAAP requires insurance companies to show a claims development table over a ten-year period (building up from a 5 year development table). This gives very useful information on the past outturn in claims experience and so useful information for assessment any potential adequacy or deficiency in claims provisions set by management.

Analysts and investors would look for consistent favourable run-off (the total liability for a particular year reducing after adding back claims payments) of claims as evidence of management using prudent claims provisioning techniques. If there is a pattern of adverse run-off then the analysts' initial assumption is likely to be that the claims liabilities in the balance sheet may be understated.

Risk disclosures

IFRS and new UK GAAP also require insurance companies to provide information on the market, credit and liquidity risk in existence at the balance sheet date. The information will normally be provided in a series of table comparing the company current balance sheet against the prior year.

In the case of, say, credit risk it will show the age profile of the outstanding balances and relevant credit rating information on these counterparties. This information can used by analysts to better understand the nature of the assets and liabilities at the balance sheet date.

Financial strength and solvency

Clearly, the financial strength of an insurance company is important as policyholders need the assurance that an insurance company will have the capacity to pay claims that they may make - claims which may be made some time after the policy has been issued. A common way of judging an insurance company's financial strength is to use a rating published by a credit rating agency such as Standard and Poor's, Moody's, Fitch or A.M. Best.

As an example, Standard and Poor's assigns ratings ranging from 'CC' (extremely weak) to 'AAA' (extremely strong). An explanation of how the process works and an explanation of the ratings awarded by Standard and Poor's can be found in their Guide to analysis of insurer financial strength (European life, non-life and reinsurance edition).

Alternative ways to assess financial strength include:

  • making an assessment based on the amount of capital held in excess of the regulatory requirement; or
  • undertaking an assessment based on published financial data.

Solvency II

Solvency II was implemented on 1 January 2016. It is a regulatory initiative that has fundamentally changed the capital adequacy regime within European insurance companies. Its aim was to establish a revised, common set of European-wide capital requirements and risk management standards that would replace the range of requirements that used to be applied across Europe. Refer to the fact file on Solvency II

Insurance companies are required to prepare Solvency II compliant regulatory reporting. There is a requirement for Solvency II reporting to be provide on a quarterly basis. In some cases insurance companies can obtain a waiver from the PRA and only provide this on an annual basis.

Solvency II has its own balance sheet valuation and recognition rules. This means there are a number of adjustments insurance companies need to make to their accounts to record them on a Solvency II basis. These include:

  • Recognising the full extent of premiums and associated claims and other costs when they are bound
  • Removing any unearned premium reserve and deferred acquisition costs
  • Recognising claims on a best estimate basis (so removing any margin for prudence)
  • Including a risk margin over claims liabilities
  • Including a binary events uplift

It is expected that there will be similarities between the Solvency II balance sheet and the balance sheet required by the IFRS 17. PriceWaterhouseCoopers discuss some of the differences between IFRS and Solvency II here.

Other matters

Incident (or accident) year compared to underwriting year

There are two ways that an insurance company can account for general insurance business - incident year, also referred to as accident year, and underwriting year. The vast majority use incident year (as this is required by most accounting standards) although some entities, such as Lloyd's syndicates, use underwriting year for their syndicate accounts. The method used does impact on reinsurance risk - this is explained below.

The fact that UK GAAP and most accounting standards require premium income to be spread over the period of risk, with unearned premium carried forward to a subsequent period, means that the accounts are drawn up on an incident year basis. The earned premium is there to cover incidents in the period and outstanding claims are calculated at the balance sheet date for incidents that have occurred up to the balance sheet date, whether reported or not.

This contrasts with the underwriting year approach which takes credit for the full premium in the year that a particular policy incepts. In the example above, in net earned premium the full premium of £1,200 would be recognised on 1 October and not spread as £300 in the first year and £900 in the subsequent year. When assessing profit for a business using an underwriting year approach, the claims provision needs to allow for all claims that may attach to policies incepting in that year.

When outwards reinsurance is placed, the reinsurance normally covers risks to match either claims incidents or claims attributable to policies written in a particular period, depending on whether incident year or underwriting year accounting has been adopted. This is an important point, as having reinsurance to match claims attributable to policies written (rather than to claims incidents) can give greater protection.

To give an example: following the 9/11 attacks on the World Trade Center in 2001, many reinsurers withdrew terrorist cover from the reinsurances they offered in 2002. For most insurers, these 2002 reinsurance policies covered incidents in 2002 and so primary insurers were exposed as they had issued policies in 2001 that did not have a terrorism exclusion. Consequently, they had exposure to terrorism losses in 2002 and, on renewal, their traditional reinsurance programme did not cover losses attributable to terrorism. Had the insurance been accounted for on an underwriting year basis the 2001 reinsurance would have covered any claims attributable to policies written in the 2001 year, including claims from incidents in 2002. Hence, accounting for insurance on an underwriting year basis provides a better match between risks accepted and reinsurance placed, which in turn reduces risk.

Looking ahead

IFRS 17 (previously known as IFRS 4 phase II)

A new IFRS standard for insurance contract accounting has been under development since 1997.

IFRS 4 represented the first phase in development of this new framework. The next phase will be the implementation of IFRS 17. IFRS 17 was previously known as IFSR 4 phase II.

The main weakness in the existing insurance standard is that both IFRS 4 and FRS 103 allow a range of different accounting policies to be applied by insurance companies, resulting in a lack of comparability, even within insurance groups.

IFRS 17 will represent a fundamental change in the way insurance companies' accounts are prepared. In particular it will change the way insurance liabilities are measured and how profit is recognised.

The IASB are current finalising the final standard. We expect to get this in the first half of 2017.

There will be parallels between IFRS 17 and Solvency II. So Solvency II reporting process can be a starting point for IFRS 17, but important differences between the frameworks are expected. Please see the following link.

IFRS 17 will be effective for all financial periods commencing on or after 1 January 2021. This is a relatively long lead time between finalising of a standard and implementation. Such a long lead time has been set because of the expected complexity with implementation of this new standard across the world.

The latest position on this development can be found on the IFRS website.

[1] Source:

Useful websites 

Further reading

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.