Ch10: UK GAAP p6?

[Spock]

Hello,

I have not studied ST3 or 303 so finding this little section difficult to understand. In section 3.2 the course notes state that "annual basis" of accounts looks at the business earned over the year. Does this mean if we take a year to be the calendar year, write a PMI policy that starts 1/11 then we would count 2 months of the annual premium paid to be the earned business?

Also, I don't quite understand why the core reading in the first paragraph says UK GAAP recognises both accounting approaches but then the next bit of core reading says UK accounting standards requie the annual basis? Shouldn't this be one or the other but not both? Or maybe I am reading this wrong.

Happy new Year!
Geetha

 

[Steve McIntosh]

Ch 10 - Section 3.2, page 6 - UK GAAP?

Hi Geetha

Your understanding of earned premium is spot on. Your example assumes that the risk is uniform over the policy year (i.e. you expect claims cost to be spread evenly over the term of the contract). This concept is explained in more detail (with examples) in the Glossary (Ch24, under “earned premium”) and in the reserving chapter of the ST1 ActEd Notes (Ch 21).

The first Core Reading paragraph (in Section 3.2) is referring to any class of general insurance (GI) business, whereas the other CR paragraph is talking about health insurance specifically. As we say in the foot of p6, the “funded basis” might be used for some types of GI business (for example, for business written by Lloyds of London or business for which it is usually many years after premiums are received before claims are settled) but this doesn’t usually apply to health insurance business, and so is out of scope for subject SA1.

This chapter is very detailed so hang in there! The good news is that the detail is hardly ever examined in Subject SA1 (or similar previous subjects), though you should have a general understanding of the material, and it may be tested in more detail in the practice module exam - P1.

Hope this helps – Happy New Year.

Steve