Hi,
I know it's a little late to ask this question but here goes.
This question is a boilerplate accounts question.
However, I have questions on the treatment of future claims handling expenses and transfers to the cat reserve.
The examiner's material states the following:
"In the UK, insurers are required to establish an Equalisation Reserve/provision over and above their claims provisions in respect of certain classes of business (regarded as being potentially volatile). Statutory rules govern the calculation of transfers to the Reserve (which are tax deductible) and transfers from the Reserve (on which tax is payable)."
Per my understanding, this means that any transfers to cat reserves and future claims handling expenses are tax deductible and when they incur, they will have to pay the tax on this.
However, the answer (approach 1) assigns additional provision for future cat and provision for future claims handling as 0. Shouldnt the entire amount come here (as a negative item) if they are tax deductible? Tax deductible implies that companies can use this to lessen the tax burden right? So in this case, shouldnt it be -4mln and -5mln respectively?
Also, how is the expense of 31 mln calculated in the second approach?
I know it's a little late to ask this question but here goes.
This question is a boilerplate accounts question.
However, I have questions on the treatment of future claims handling expenses and transfers to the cat reserve.
The examiner's material states the following:
"In the UK, insurers are required to establish an Equalisation Reserve/provision over and above their claims provisions in respect of certain classes of business (regarded as being potentially volatile). Statutory rules govern the calculation of transfers to the Reserve (which are tax deductible) and transfers from the Reserve (on which tax is payable)."
Per my understanding, this means that any transfers to cat reserves and future claims handling expenses are tax deductible and when they incur, they will have to pay the tax on this.
However, the answer (approach 1) assigns additional provision for future cat and provision for future claims handling as 0. Shouldnt the entire amount come here (as a negative item) if they are tax deductible? Tax deductible implies that companies can use this to lessen the tax burden right? So in this case, shouldnt it be -4mln and -5mln respectively?
Also, how is the expense of 31 mln calculated in the second approach?
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