LAM07030 | Trade profits: Financial statements: valuation of technical provisions

Technical provisions represent the amount that an insurer requires to fulfil its insurance obligations over the lifetime of its insurance contracts. Technical provisions are important for tax because they are generally one of the largest items on the balance sheet and movements directly impact the insurer’s profit.

There is no single standard approach to the calculation of technical provisions and different approaches may be used in the financial statements and the regulatory returns. On a Solvency I basis policyholder liabilities may include an implicit prudential margin. Under Solvency II (the regulatory basis since 1 January 2016 but still not commonly used as a basis for the accounts), technical provisions are calculated from the best estimate of the liabilities plus a risk margin and in some cases a transitional adjustment. It is not normally necessary to challenge the calculation of technical provisions. However if there are potential grounds for challenge accountancy and actuarial advice will be required.