| Paragraphs IG2.14 to IG2.20 provide guidance for applying the requirements of paragraph 54 of Schedule 3 to the Regulations. They are only relevant to general insurance business. |
| IG2.14 | Paragraph 54 of Schedule 3 to the Regulations permits explicit discounting subject to certain conditions, one of which is that the expected average interval between the date for the settlement of claims being discounted and the reporting date must be at least four years. The four-year test should be applied by reference to the end of each reporting period in respect of all claims outstanding at that date, and not just once in the accounting period in which the claims were incurred. |
| IG2.15 | Where applied, explicit discounting should normally be adopted by reference to categories of claims (with similar characteristics but not solely by length of settlement pattern), rather than to individual claims. |
| IG2.16 | The calculation of the average interval referred to in paragraph IG2.14 should be weighted on the basis of expected claims before any deduction for reinsurance. |
| IG2.17 | Discounting should be considered only if there is adequate data available to construct a reliable model of the rate of claims settlement. The principal factors to be considered are the amount of future claims settlements, the timing of future cash flows and the discount rate. Procedures should be undertaken to assess the accuracy of the claims settlement pattern predicted by the model in prior periods and the current model should be adjusted, as appropriate, to reflect the out-turn and conclusions of analyses in the previous period. Cash flows should be modelled gross and net of reinsurance as reinsurance recoveries may arise later than the related claims payments. |
| IG2.18 | For the purpose of determining an appropriate discount rate, justification of the rate requires consideration of the returns achieved over the period in question to the extent that this is relevant to the future. |
| IG2.19 | The effect of the unwinding of discounted claims provisions during a reporting period should be disregarded in considering whether material adverse run-off deviations have arisen requiring disclosure under note 4 of the Notes to the Profit and Loss Account format in Schedule 3 to the Regulations. |
| IG2.20 | Investment return associated with any unwinding of the discount on general insurance business claims provisions in a reporting period should be recorded under the headings for investment income or gains in the appropriate sections of the income statement (referred to as the profit and loss account in the Act). Separate disclosure should then be made, where material, of the amount of the investment return which corresponds to the unwinding of the discount. |
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