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ACCOUNTING POLICIES
Basis of preparation and consolidation
The consolidated financial statements have been prepared in
accordance with applicable accounting standards and under the
historical cost accounting rules, modified to include the revaluation
of investments, in accordance with the provisions of Section 255A,
Schedule 9A and other requirements of the Companies Act 1985.
The Group has also adopted the recommendations of the Statement
of Recommended Practice on Accounting for Insurance Business,
issued by the Association of British Insurers (ABI SORP) issued in
December 1998.
The balance sheet of the parent company has been prepared in
accordance with the provisions of Section 230 of, and Schedule 4
to, the Companies Act 1985. In accordance with the exemption
permitted under this section, the profit and loss account of the
Company is not presented as part of these accounts.
The financial statements consolidate the accounts of the Company,
its subsidiary undertakings, and the Group’s underwriting through
participation on Lloyd’s syndicates. The accounting information in
respect of non-aligned syndicate participations has been provided
by the managing agents of those syndicates through an information
exchange facility operated by Lloyd’s and has been audited by the
respective syndicates’ auditors. The actual information in respect of
these non-aligned participations is included to the extent that it is
available or, where this is not the case, provisions are made for the
expected impact.
Goodwill arising on consolidation of acquisitions prior to 31 May
1998, representing the excess of the fair value of the consideration
over the fair value of the assets acquired, has been written off
against reserves.
The Urgent Issues Task Force (UITF) of the Accounting Standards
Board issued UITF 38 – Accounting for ESOP trusts – in December
2003 which, in conjunction with changes to the Companies Act,
requires that shares held by Employee Share Ownership Trusts should
be treated as Treasury shares and shown as a part of a company’s
equity rather than as an asset on the balance sheet. The Group has
adopted the recommendation and the balance sheet for 2002 has
been restated to reflect the change.
In addition, UITF 38 requires that the gain or loss on issue of shares
to option holders should not be recognised in the Group profit
and loss account or statement of total recognised gains and losses.
This policy has also been adopted. The restatement of the 2002
comparative does not impact the previously stated figures.
UITF 38 amended part of UITF 17 – Employee share schemes.
This requires companies to recognise a charge for its share option
schemes, with the exception of ‘save as you earn’ type schemes such
as the Amlin Sharesave scheme. The charge that is required to be
recognised is based on the difference between the option price and
the share price on the date of grant of the option. Amlin has adopted
UITF 17 in respect of its share options during the year. There is no
impact on the Group results in either the current or preceding year
as Amlin does not grant executive options at a discounted price.
Except as noted above, the following principal accounting policies
have been applied consistently in both the current and preceding year.
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Aligned syndicate participations
The Group’s aligned syndicate participations are presented on
an annual accounting basis.
Premiums
Written premiums comprise premiums on contracts incepting during
the financial year. Premiums are disclosed gross of brokerage and
exclude taxes and duties levied on them. Estimates are included for
‘pipeline’ premiums, representing amounts due to the Group but not
yet notified, as well as adjustments made in the year to premiums
written in prior accounting periods.
Outward reinsurance premiums are accounted for in the same
accounting period as the related direct insurance or inwards
reinsurance business.
Unearned premiums
A provision for unearned premiums represents that part of premiums
written, and reinsurers’ share of premiums written, which is estimated
to be earned in following financial years. It is calculated separately
for each insurance contract on the 24ths or 365ths basis, where the
incidence of risk is the same throughout the contract. Where the
incidence of risk varies during the term of the contract, the provision
is based on the estimated risk profile of business written.
Acquisition costs
Acquisition costs comprise brokerage incurred on insurance contracts
written during the financial year. They are spread over an equivalent
period to that which the premiums on the underlying business are
earned. Deferred acquisition costs represent the proportion of
acquisition costs incurred in respect of unearned premiums at the
balance sheet date.
Claims paid
Claims paid comprise claims and claims handling expenses paid
during the financial year.
Claims provisions
The change in the provision for claims represents the movement in
the provision for claims outstanding, including claims incurred but
not reported (IBNR) and internal and external claims settlement
expenses allocated to those transactions. The gross provision for
claims outstanding is included as a liability on the balance sheet.
The technical claims provision represents management’s estimate
of the cost of settling all claims incurred but unpaid at the balance
sheet date, whether reported or not. The reinsurers’ share of these
anticipated future claims is calculated by applying the gross
provisions against the Group’s reinsurance protection and is net of
any provision for bad debt based on an assessment of the underlying
security of the reinsurers on the policies. The reinsurers’ share of
technical provisions is included as an asset on the balance sheet.
Basis of calculation of technical claims provision
Provisions for claims outstanding comprise notified claims and IBNR.
Notified claims are estimates of future claims payments in respect of
reported claims based on the latest information available including
advices from claims assessors and lawyers. The IBNR element is
calculated initially by each of the Company’s divisions using
statistical analysis of historical trends, balanced with interpretation
of current underwriting trends and market and case loss
information, in order to calculate the ultimate loss projection of the
business on risk. Where Amlin leads business it has control over the
agreement of claims and where it does not lead it relies on the lead
underwriter to keep it informed of the latest developments.
These claims provisions are reviewed to ensure judgements made are
reasonable and supportable. This review process includes comparison
of technical claims provisions, on an underwriting year basis, with
independent actuarial projections produced on a best estimate basis
by our in-house actuarial team. The underwriting year loss ratios are
then adjusted to remove assumed future major losses. This process is
repeated each quarter with the actuarial assessment reviewed at the
end of the financial year by an external, independent actuary.
Although the claims provision is considered to be reasonable, having
regard to previous claims experience, the statistical projections and
case reviews of notified losses, the ultimate liabilities will vary as a
result of subsequent developments and events. These adjustments
are reflected in the financial statements for the period in which the
related adjustments are made.
Unexpired risks provision
Provision is made for unexpired risks where, at the balance sheet
date, the costs of outstanding claims and related deferred acquisition
costs are expected to exceed the unearned premium provision.
The unexpired risks provision is included within technical provisions
in the balance sheet.
Non-aligned syndicate participations
The Group’s non-aligned syndicate participations consist entirely of
run-off syndicate years of account. These participations are reported
on an extension to the three year accounting basis, not on an annual
accounting basis, whereby movements in the calendar year are
reported.
Premiums
Written premiums comprise premiums on contracts incepting during
the financial year. Premiums are disclosed gross of brokerage payable
and exclude taxes and duties levied on them. Estimates are made for
‘pipeline’ premiums, representing amounts due to the Group but not
yet notified, as well as adjustments made in the year to premiums
written in prior accounting periods. Outward reinsurance premiums
are accounted for in the same accounting period as the related direct
insurance or inwards reinsurance business.
Claims
Claims incurred comprise claims and claims handling expenses
paid during the financial year together with the movement in the
provision for claims outstanding and settlement expenses, including
claims IBNR.
Loss provisions on open years
Provision is made for the estimated future deterioration of any year
of account of any syndicate that has gone into run-off. While the
directors make every effort to ensure that adequate provision is made
for losses on open years of account, their view of the ultimate loss
may vary in later periods as a result of subsequent information and
events. This in turn may require adjustment of the original provisions.
These adjustments are reflected in the financial statements for the
period in which the related adjustments are made.
Other accounting policies
Exchange rates
Income and expenditure in US dollars, Euros and Canadian dollars
is translated at average rates of exchange for the period. Underwriting
transactions denominated in other foreign currencies are included
at their historical rates.
Syndicate assets and liabilities, expressed in US dollars, Euros and
Canadian dollars are translated into sterling at the rates of exchange
at the balance sheet date.
Differences arising on translation of foreign currency amounts on
insurance transactions are included in the technical account. Other
assets, liabilities, income and expenditure expressed in foreign
currencies have been translated at the rates of exchange at the
balance sheet date. Where contracts to sell currency for sterling have
been entered into prior to the year end, the contracted rates have
been used. Differences arising on translation of foreign currency
amounts on such items are included in the non-technical account.
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Investments
Listed investments are stated at market value at the close of business
on the balance sheet date. Unlisted investments are valued by the
directors on a prudent basis with regard to their likely realisable value.
In the Company’s accounts, investments in Group undertakings are
stated at cost less provisions for impairment.
Syndicate investments and investment income
Syndicate investments and cash are held on a pooled basis, the
return from which is allocated to underwriting years of account
proportionately to the funds contributed by the year of account.
Investment return
All dividends and any related tax credits are recognised as income on
the date the related listed investments are marked ex-dividend. Other
investment income, interest receivable, expenses and interest payable
are recognised on an accruals basis.
Realised gains or losses are calculated as the difference between the
net sales proceeds and their purchase price in the financial year or
their valuation at the commencement of the year. Unrealised gains
and losses are calculated as the difference between the valuation of
investments at the balance sheet date and their purchase price in the
financial year or valuation at the commencement of the year.
Allocation of investment return
All of the investment return arising in the year is reported initially in
the non-technical account. A transfer is made from the non-technical
account to the technical account representing:
- for the aligned syndicate participations, the longer term investment
return on investments supporting the technical provisions and
related shareholders’ funds. The longer term investment return
is an estimate of the expected return over time for each relevant
category of investments having regard to past performance, current
trends and future expectations; and
- for the non-aligned syndicate participations, the actual return
on investments supporting the technical provisions and related
shareholders’ funds.
Intangible fixed assets
The cost of syndicate participations which have been purchased
in the Lloyd’s capacity auctions is capitalised and amortised on a
straight line basis over its estimated useful economic life of twenty
years beginning in the underwriting year in which the purchased
syndicate participation commences.
Other income and charges
Agency fees are recognised on an accruals basis. Profit commission
receivable is accrued in direct relation to underwriting income earned
and is subject to the normal managing agent’s terms.
Tangible fixed assets
The cost of other fixed assets is depreciated over their expected
useful lives on a straight line basis. Depreciation rates are within the
following ranges:
| Leasehold land and buildings |
Over period of lease |
| Motor vehicles |
25 – 33% per annum |
| Computer equipment |
33 – 50% per annum |
| Furniture and office equipment |
20 – 50% per annum |
| Internal property improvements |
20 – 33% per annum |
Pensions
Pension contributions to defined benefit schemes are charged to
the profit and loss account so as to spread the cost of pensions over
employees’ working lives with the Group, based on actuarial triennial
valuations. Pension contributions to employees’ money purchase
schemes are charged to the profit and loss account when due.
Amlin contributes to a defined benefit scheme that is for the
purposes of both Statement of Standard Accounting Practice 24 and
Financial Reporting Standard 17 considered to be a multi-employer
scheme. Consequently, contributions to the scheme are charged to
the profit and loss account when due.
Deferred tax
Deferred taxation is provided in full on timing differences that result
in an obligation at the balance sheet date to pay more tax, or a right
to pay less tax, at a future date, at rates expected to apply when they
crystallise based on current tax rates and law. Timing differences
arise from the inclusion of items of income and expenditure in
taxation computations in periods different from those in which
they are included in financial statements. Deferred tax assets are
recognised to the extent that it is regarded as more likely than
not that they will be recovered. Deferred tax assets and liabilities
are not discounted.
Leased assets
Assets held under finance leases and hire purchase transactions
are capitalised in the balance sheet and depreciated over their useful
lives. The outstanding instalments are included in creditors and
the interest element is charged against profits over the period of
the contract.
Payments made under operating leases are charged to the profit and
loss account evenly over the period of the lease. Where there are rent
free periods in property leases, the cost of the lease is spread evenly
up to the period of the first rent review.
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