What is the difference between Accounting basis

[Minh Ho]

Funded Accounting, Accident Year Accounting and Annual Accounting, what is the differences?
Thanks guy,

 

[Katherine Young]

The glossary defines funded accounts as:

A method of accounting whereby premiums, claims and associated expenses are related to the underwriting year in which the policies start. The recognition of any underwriting profit is deferred until a subsequent accounting period but provision is made for losses as soon as they are foreseen.

Lloyd’s syndicates will use funded accounts (internally at least) to keep track of the profit / loss attributable to each Name, because Names participate on specific underwriting years and their profit is released only at the end of three years. Hence, it is also referred to as three-year accounting.

Accident-year accounting is defined in the glossary as:

A basis of accounting that presents, at the balance sheet date, the estimated technical account for accidents occurring on or before the balance sheet date.

It is also called annual accounting.

 

[Minh Ho]

The glossary defines funded accounts as:

A method of accounting whereby premiums, claims and associated expenses are related to the underwriting year in which the policies start. The recognition of any underwriting profit is deferred until a subsequent accounting period but provision is made for losses as soon as they are foreseen.

Lloyd’s syndicates will use funded accounts (internally at least) to keep track of the profit / loss attributable to each Name, because Names participate on specific underwriting years and their profit is released only at the end of three years. Hence, it is also referred to as three-year accounting.

Accident-year accounting is defined in the glossary as:

A basis of accounting that presents, at the balance sheet date, the estimated technical account for accidents occurring on or before the balance sheet date.

It is also called annual accounting.

Accident year accounting includes change in reserve, while funded accounting doesn’t include reserve, right?

 

[Katherine Young]

Companies must always hold reserves, irrespective of whether they use accident year or underwriting year accounts.

For underwriting year accounts, the accounting rules will stipulate how long companies must wait before releasing profit. We often talk about 3 years because this applies to Lloyd's Names.

In this case, imagine that the syndicate has a big bank account, which receives all income (premiums, reinsurance recoveries, investment income etc) and pays all outgo (claims, expenses, brokerage, RI premiums etc). This bank account will run for 3 years. Hopefully, the balance will always be positive, ie the business will be profitable. But it can't pay any money back (to the Names) for at least three years, so implicitly that bank account is still holding reserves and retaining profit for three years.

Only after the end of three years will the balance be calculated and any surplus be distributed to the Names. Even then, reserves will still be held after the three years have elapsed in respect of claims that are still outstanding or still unreported.

In practice, it’s much more complicated than I have described here. See Subjects SP7 and SA3 for more explanation.

I wouldn't spend too much time thinking about this though. Overwhelmingly, companies around the world use accident year accounts.