Implementation Guidance To FRS 103 (January 2022)

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Guidance
Accounting and Reporting
Financial Reporting Council
January 2022
Implementation Guidance to
accompany FRS 103 Insurance
Contracts
Guidance for entities issuing insurance
contracts on applying:
z FRS 103;
z the requirements or principles of
Further copies, £18.00 (post-free) can be obtained from:

FRS 102 to insurance contracts; and
FRC Publications
z Schedule 3 to the Regulations.
Lexis House
30 Farringdon Street
London
EC4A 4HH
Tel: 0845 370 1234

Email: [email protected]
Or order online at: www.frcpublications.com
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January 2022
Contracts
. FRS 103;
. the requirements or principles of
. Schedule 3 to the Regulations.
Contents
Page
Overview 3
Implementation Guidance to accompany FRS 103 Insurance Contracts 5

1 Guidance for entities with long-term insurance business 6
2 Guidance for entities with general insurance business or long-term insurance
business 9
Appendix Republic of Ireland legal references 22
3 Guidance on capital disclosures for entities with long-term insurance business 25
Financial Reporting Council 1

2 Implementation Guidance to accompany FRS 103 (January 2022)
Overview
(i) This Implementation Guidance accompanies, but is not part of, FRS 103 Insurance
Contracts. Accordingly, it does not carry the authority of an accounting standard and shall
not be regarded as mandatory. It provides guidance on applying:
(a) the requirements of FRS 103;
(b) the requirements or principles of FRS 102 The Financial Reporting Standard
applicable in the UK and Republic of Ireland by entities with general insurance
business or long-term insurance business; and
(c) the requirements of Schedule 3 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008 (SI 2008/410).
(ii) A number of the sections of FRS 102 exclude insurance contracts from their scope.
However, FRS 102 requires entities developing accounting policies for transactions,
other events or conditions not specifically addressed in FRS 102 (or another FRS) to
consider the applicability of the requirements and guidance in FRS 102 (or another FRS)
dealing with similar or related issues. Therefore, where relevant, this Implementation
Guidance includes guidance on the application of the principles of certain sections of
FRS 102 to insurance contracts, even though insurance contracts may not be within the
scope of those sections. This is consistent with selecting accounting policies in
accordance with the principles of FRS 102 and FRS 103.
(iii) This Implementation Guidance has been developed from material that was previously
included in either FRS 27 Life Assurance (prior to it being withdrawn by FRS 103) or the
Association of British Insurers’ Statement of Recommended Practice on Accounting for
Insurance Business (the ABI SORP) (published in December 2005 and amended in
December 2006 prior to it being withdrawn following the issue of FRS 103). Paragraphs
that have been sourced from the ABI SORP, and to a lesser extent those from FRS 27,
have been revised where they needed updating, for example to reflect new legislative
requirements or for consistency with FRS 102. Each section of the Implementation
Guidance specifies the requirements that it relates to.
(iv) Terms defined in the Glossary to FRS 103 are in bold type the first time they appear in
each section in the Implementation Guidance.
(v) This edition of the Implementation Guidance to accompany FRS 103 issued in
January 2022 updates the edition of the Implementation Guidance issued in
March 2018 for the following:
(a) Amendments to UK and Republic of Ireland accounting standards – UK exit from
the European Union issued in December 2020; and
(b) some minor typographical or presentational corrections.

Implementation Guidance to accompany
FRS 103 Insurance Contracts
Guidance for entities issuing insurance contracts on applying:

. FRS 103;
. the requirements or principles of FRS 102 to insurance contracts; and
. Schedule 3 to the Regulations.
This Implementation Guidance accompanies, but is not part of, FRS 103 Insurance Contracts.
Accordingly it does not carry the authority of an accounting standard and shall not be regarded
as mandatory.

Implementation Guidance – Section 1
Guidance for entities with long-term insurance business
This guidance accompanies, but is not part of, FRS 103. It provides guidance for applying the
requirements of FRS 103.
Recognition and measurement: with-profits business
Paragraphs IG1.1 to IG1.13 provide guidance for applying the requirements of paragraphs 3.11
to 3.15 of FRS 103.
Measurement of with-profits liabilities and related assets
IG1.1 An entity may, but is not required to, adopt the requirements of paragraph 3.12 of
FRS 103 Insurance Contracts for UK with-profits business1 that does not fall within
the scope of paragraph 3.1(b) of FRS 103. If an entity changes its accounting policy
for such with-profits business it shall only do so in accordance with paragraph 2.3 of
FRS 103.
IG1.2 The shareholders’ share of projected future bonuses deducted in accordance with
paragraph 3.12(a) of FRS 103 should be calculated as the value of future transfers to
shareholders calculated using market consistent financial assumptions, and assuming
that transfers take place at a level consistent with those assumptions used to calculate
the realistic value of liabilities. Where an explicit assumption is not required in order
to calculate the liabilities then continuation of the current profit sharing arrangements
should be assumed unless the firm has plans to change this approach. Non-economic
projection assumptions should be consistent with those used in determining the
realistic value of liabilities. The amount deducted in accordance with this paragraph
should be taken to the fund for future appropriations (FFA). If shareholders
transfers have been included as part of the realistic value of liabilities (or otherwise
included in liabilities) then the amount of such transfers should be taken out of
liabilities and included in the FFA, together with any related tax liability. If shareholders
transfers have not been set up as part of the realistic value of liabilities or elsewhere,
no adjustment is required.
IG1.3 In determining the realistic value of liabilities, a with-profits life fund may take account
of the value of future profits expected to arise from any non-participating business
that forms part of the with-profits fund – sometimes referred to as the value of in-force
life assurance business (VIF). Excluding the VIF from the statement of financial
position whilst recognising the realistic value of liabilities in full, and valuing the
non-participating liabilities in the with-profits fund on a statutory basis, would give rise
to an inconsistency in the fund’s net assets. An entity is therefore permitted to
recognise the VIF if that business has been taken into account in measuring the
liability, in the circumstances of paragraph 3.12(c) of FRS 103, even though there is
not a direct link between the value of the asset and the amount of the liabilities. Where
there is not a direct link between the value of the business and the amount of realistic
liabilities, but the value is taken into account in determining those liabilities, it is
appropriate to recognise the total value of the business. Although not separately
identifiable, any excess value over that included in realistic liabilities will be taken to
the FFA.
1
And Republic of Ireland with-profits funds.

IG1.4 Paragraph 3.12(c) of FRS 103 permits an amount to be recognised for VIF on
non-participating business written in a with-profits fund when the determination of the
realistic value of liabilities takes account of this value either directly or indirectly. Where
with-profits policyholders are entitled to a share of the profits on non-participating
business it would generally be expected that the determination of the realistic liabilities
would take account, directly or indirectly, of the value of future profits on this business.
IG1.5 The amount recognised under paragraph 3.12(c) or 3.12(d) of FRS 103 may be
regarded either as an additional asset, representing the value of future cash flows from
the related insurance business; or as an adjustment to the measurement of liabilities
and the FFA, being the deduction from these items of the obligation to transfer an
unrecognised asset or other source of value. Paragraph 5.3 of FRS 103 requires
entities to present this as an adjustment to liabilities, unless this would not be in
compliance with the statutory requirements that apply to the entity, in which case
FRS 103 permits the amount to be recognised as an asset.
IG1.6 The VIF recognised within assets as described in paragraph IG1.3 is determined as
the discounted value of future profits expected to arise from the policies, taking into
account liabilities relating to the policies measured on the statutory solvency basis.
This includes adjustments made onto a modified statutory solvency basis (MSSB)
for the purposes of the financial statements (for example, to adjust liabilities to
exclude certain additional reserves included in the liabilities when measured on the
statutory solvency basis, or where future income included in the VIF covers deferred
acquisition costs included in the statement of financial position). A corresponding
adjustment to the value of in-force policies will need to be made in order to ensure a
consistent valuation.
IG1.7 Paragraph IG1.4 explains that the value calculated must be adjusted to ensure
consistency where adjustments have been made onto the MSSB measurement basis
in relation to non-participating contracts. The measurement of the VIF asset may take
into account the release of capital requirements for non-participating business. It
would not be appropriate to recognise this release of capital requirements within the
VIF asset presented in the accounts because the MSSB liabilities do not include an
allowance for capital. Therefore the amount of the VIF asset should be adjusted
accordingly.
IG1.8 The profit recognition profile for non-participating contracts which do not satisfy
FRS 103’s definition of an insurance contract or contain a discretionary
participation feature will be determined by the requirements of Sections 11 Basic
Financial Instruments, 12 Other Financial Instruments Issues and 23 Revenue of
FRS 102. Where these contracts are written in a with-profits fund, paragraph IG1.4
will apply but the VIF recognised for such contracts should be adjusted to reflect the
difference in the profit recognition bases between the basis used to determine the VIF
taken into account in determining the realistic value of liabilities and the profit
recognition profile determined by FRS 102.
IG1.9 Paragraph 3.12(d) of FRS 103 permits that when a with-profits fund has an interest in
a subsidiary or associate and the determination of the realistic value of liabilities takes
account of a value for that interest at an amount in excess of the net amounts that
would be included in the entity’s consolidated accounts, an amount may be recognised
representing this excess. As explained in paragraph 3.15 of FRS 103 this situation
could arise where the subsidiary or associate writes non-participating business and
the value of the subsidiary or associate incorporates the VIF of non-participating
business written in the subsidiary or associate. The value of the subsidiary or
associate is reduced by the subsidiary’s or associate’s capital requirement as noted in
rule 1.3.33(3) of INSPRU as at 31 December 2015. When preparing both
consolidated and non-consolidated accounts, the excess value that may be

recognised should therefore be taken as the excess before deduction of the
subsidiary’s or associate’s capital requirement.
IG1.10 Where the amounts on a ‘realistic’ basis determined in accordance with

paragraph 3.12 of FRS 103 are different from the amounts on the MSSB, a
corresponding amount is transferred to or from the FFA, so that there is no effect
on equity. The potential shareholders’ share corresponding to additional bonuses to
policyholders that have been included in the policyholders’ liability should be
accounted for in the FFA. As a result, there will generally be no change in the profit
for the reporting period except where the adjustments result in a negative balance on
the FFA and the entity determines that this negative balance should result in a
deduction from equity through profit or loss.
Policyholders’ options and guarantees
IG1.11 Entities with with-profits business within the scope of paragraph 3.1(b) of FRS 103 are
required to measure the liability of that business in respect of options and
guarantees relating to policyholders either at fair value or at an amount estimated
using a market-consistent stochastic model.
IG1.12 For all entities with long-term insurance business, the best basis for measuring
policyholders’ options and guarantees is one that includes their time value2. Any
deterministic approach to valuation of a policy with a guarantee or optionality feature
will generally fail to deal appropriately with the time value of the option. Therefore
stochastic modelling techniques to evaluate the range of potential outcomes should be
used unless a market value for the option is available. The regulatory framework
includes a requirement to value options and guarantees on this basis. For the liabilities
of businesses not falling within the scope of paragraph 3.1(b) of FRS 103, entities are
encouraged, but not required, to adopt these valuation techniques. Where options are
not valued on this basis, additional disclosures are required; these are set out in
paragraph IG3.14(c).
IG1.13 In determining the value of guarantees and options under the regulatory framework,
the entity will take into account under each scenario in the market-consistent
stochastic modelling management actions it anticipates would be taken in response to
variations in market variables (such as changing the balance of the investment
portfolio between debt instruments and equity, varying the amount charged to
policyholders, or varying its bonus policy) that will affect the amount payable under the
guarantee or option. Such actions must be realistically capable of being implemented
within the timescale assumed in the scenario analysis, and be consistent with the
entity’s published principles and practices of financial managements (PPFM).
2
The value of an option or guarantee comprises two elements; the intrinsic value and the time value. The intrinsic value is the
amount that would be payable if the option or guarantee were exercised immediately – that is, the amount it is currently ‘in the
money’, or nil if it is ‘out of the money’. The time value is the additional value that reflects the possibility of the intrinsic value
increasing in future, before the expiry date of the option or guarantee.

Guidance for entities with general insurance business or long-term
insurance business
This guidance accompanies, but is not part of, FRS 103. It provides guidance for applying:
. the requirements of FRS 103;
. the requirements or principles of FRS 102 The Financial Reporting Standard
applicable in the UK and Republic of Ireland by entities with general insurance
business or long-term insurance business; and
. the requirements of Schedule 3 to the Regulations.
Gross written premiums
Paragraphs IG2.1 to IG2.8 provide guidance for applying the principles of Section 23 Revenue
of FRS 102 to general insurance contracts.
IG2.1 Underwriting results should be determined on an annual basis, notwithstanding that

this will normally require some estimation to be made at the reporting date,
particularly with regard to outstanding claims.
IG2.2 Written premiums should comprise the total premiums receivable for the whole
period of cover provided by the contracts entered into during the reporting period,
regardless of whether these are wholly due for payment in the reporting period,
together with any adjustments arising in the reporting period to such premiums
receivable in respect of business written in prior reporting periods.
IG2.3 Regardless of the method by which commission is remitted (eg by an intermediary),

grossing up for the commission should be applied, if necessary on an estimated basis,
as this correctly reflects the contractual arrangements in force. This also applies where
the premiums are determined by an intermediary. Where, however, policies are issued
to intermediaries on a wholesale basis and they are themselves responsible for setting
the final amount payable by the insured without reference to the insurer, the written
premium will normally comprise the premium payable to the insurer and grossing up
will be inappropriate unless it reflects the contractual position.
IG2.4 Written premiums should include an estimate for pipeline premiums relating only to
those underlying contracts of insurance where the period of cover has commenced
prior to the reporting date.
IG2.5 Where an insurer has offered renewal and is therefore contractually liable to pay
claims if renewal is subsequently confirmed by the policyholder, it should recognise
the renewal premium in income, subject to making a provision for anticipated lapses
and the necessary proportion of unearned premiums.
IG2.6 Under some policies written premiums may be adjusted retrospectively in the light of
claims experience or where the risk covered cannot be assessed accurately at the
commencement of cover. Where written premiums are subject to an increase
retrospectively, recognition of potential increases should be deferred until the
additional amount can be ascertained with reasonable certainty. Where written
premiums are subject to a reduction, a remeasurement taking account of such a
reduction should be made as soon as the entity has an obligation to the policyholder.
IG2.7 Additional or return premiums should be treated as a remeasurement of the initial

premium. Where a claims event causes a reinstatement premium to be paid, the

recognition of the reinstatement premium and the effect on the initial premium should
reflect the respective incidence of risk attaching to those premiums in determining
under the annual accounting basis that proportion earned and unearned at the
reporting date.
IG2.8 Written premiums should be recognised as earned premiums over the period of the
policy having regard to the incidence of risk. Time apportionment of the premium is
normally appropriate if the incidence of risk is the same throughout the period of cover.
If there is a marked unevenness in the incidence of risk over the period of cover, a
basis which reflects the profile of risk should be used. The proportion of the written
premiums relating to the unexpired period of these policies should be carried forward
as an unearned premiums provision at the reporting date.
Claims
Paragraphs IG2.9 to IG2.13 provide guidance for applying the principles of Section 21
Provisions and Contingencies of FRS 102 to general insurance contracts.
IG2.9 The entity should recognise a provision in the statement of financial position, and
recognise the amount of the provision as an expense, for the expected ultimate cost of
settlement of all claims in respect of events up to the reporting date, whether reported
or not, together with related internal and external claims handling expenses, less
amounts already paid.
IG2.10 In relation to an entity’s existing accounting policies, the level of claims provisions
should continue to be set such that no adverse run-off deviation is envisaged. In
determining the estimate of the amount required to settle the obligation at the reporting
date consideration should be given to the probability and magnitude of future
experience being more adverse than previously assumed. An entity may not introduce
this practice either if it changes its existing accounting policies or develops a new
accounting policy.
Claims handling expenses
IG2.11 Provision should be made at the reporting date for all claims handling expenses to
cover the anticipated future costs of negotiating and settling claims which have been
incurred, whether reported or not, up to the reporting date. Separate provisions should
be assessed for each category of business.
IG2.12 In determining the provision for claims handling expenses, unless clear evidence is
available to the contrary, it should be assumed that the activity of the claims handling
department will remain at its current level and therefore that the contribution to its
costs from future new business will remain at the same level.
IG2.13 The provision for claims handling expenses should be included within the provision for
claims outstanding but need not be separately disclosed. Claims handling expenses
incurred should be included within claims incurred in the technical account for
general business.
Discounting
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 on 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.
Unexpired risks provision
Paragraphs IG2.21 to IG2.27 provide guidance for applying the requirements of

paragraphs 2.14 to 2.19 of FRS 103 and the principles of Section 21 Provisions and
Contingencies and Section 32 Events after the End of the Reporting Period of FRS 102. They
are only relevant to general insurance business.
IG2.21 Subject to paragraph IG2.26, where the estimated value of claims and expenses
attributable to the unexpired periods of policies in force at the reporting date exceeds
the unearned premiums provision in relation to such policies after deduction of any
deferred acquisition costs, an unexpired risks provision should be established. If
material, this provision shall be disclosed separately either in the statement of financial
position or in the notes to the financial statements.
IG2.22 The assessment of whether an unexpired risks provision is necessary should be made
for each grouping of business which is managed together. Any unexpired risks
surpluses and deficits within that grouping should be offset in that assessment. For
this purpose ‘managed together’ is defined in paragraph IG2.23.

IG2.23 Business should only be regarded as being managed together where no constraints
exist on the ability to use assets held in relation to such business to meet any of the
associated liabilities and either:
(a) there are significant common characteristics, which are relevant to the
assessment of risk and setting of premiums for the business lines in question; or
(b) the lines of business are written together as separate parts of the same
insurance contracts.
IG2.24 For delegated authorities (ie where the insurer is unable to influence the terms on
which policies are issued) a provision should be established at the reporting date for
any anticipated losses arising on policies issued in the period after the reporting date
which the delegated authority entered into before that date.
IG2.25 The assessment of whether an unexpired risks provision is required, and if so its
amount, should be based on information available at the reporting date which may
include evidence of relevant previous claims experience on similar contracts adjusted
for known differences, events not expected to recur and, where appropriate, the
normal level of seasonal claims if the previous reporting period was not typical in this
respect. The assessment should not however take into account any new claims events
occurring after the reporting date, as these are non-adjusting events. In accordance
with paragraph 32.10 of FRS 102 exceptional claims events occurring after the end of
the reporting period but before the financial statements are authorised for issue shall
be disclosed in the notes to the financial statements together with an estimate of their
financial effect. Where there is uncertainty concerning future events, in accordance
with paragraph 2.9 of FRS 102, an insurer shall include a degree of caution in the
exercise of the judgements needed in making the estimates required such that
liabilities are not understated.
IG2.26 In calculating the best estimate of the amount required to settle future claims in relation
to the unexpired periods of risk on policies in force at the reporting date, the future
investment return arising on investments supporting the unearned premiums provision
and the unexpired risks provision may be taken into account. For the purposes of
calculating this provision, the deferred acquisition costs should be deducted from the
unearned premiums provision. The investment return will be that expected to be
earned by the investments held until the future claims are settled.
IG2.27 Deferred acquisition costs should not be written off, in whole or in part, to profit or
loss as being irrecoverable for the purpose of reducing or eliminating the need for an
unexpired risks provision.
Equalisation reserves
Paragraph IG2.28 provides guidance for applying the requirements of note 24 of the Notes on
the Balance Sheet format in Schedule 3 to the Regulations. They are only relevant to general
insurance business.
IG2.28 Disclosure should be made where an equalisation reserve has been established in
accordance with the PRA Rulebook. Where equalisation reserves are established, an
entity should disclose the following in the notes to the financial statements:
(a) that the amounts provided are not liabilities because they are in addition to the
provisions required to meet the anticipated ultimate cost of settlement of
outstanding claims at the reporting date;
(b) notwithstanding this, they are required by Schedule 3 to the Regulations to be
included within technical provisions; and

(c) the impact of the equalisation reserves on equity and the effect of movements
in the reserves on the profit or loss for the reporting period.
Portfolio premiums and claims
Paragraphs IG2.29 to IG2.32 provide guidance for applying the principles of Section 23
Revenue of FRS 102. They are only relevant to general insurance business.
IG2.29 Portfolio premiums payable should be included within premiums for reinsurance
outwards in the financial statements of the transferor undertaking but deferred to
subsequent reporting periods as appropriate in respect of any unexpired period of risk
at the reporting date. In the financial statements of the transferee undertaking they
should be included within written premiums with any amount unearned at the reporting
date being carried forward in the unearned premiums provision.
IG2.30 Portfolio claims transfers should be recognised in the financial statements of the
transferor undertaking as payments in settlement of the claims transferred in
accordance with the requirements of note 4 of the Notes on the Profit and Loss
Account format in Schedule 3 to the Regulations.
IG2.31 Similarly, the consideration receivable by the transferee undertaking should be

credited to claims payable in the statement of financial position.
IG2.32 Disclosure should be made in notes to the financial statements of any claims portfolio
transfers, which materially affect the transferee undertaking’s exposure to risk.
Structured settlements
Paragraph IG2.33 provides guidance applying the requirements of paragraph 2.13(c) of

FRS 103. They are only relevant to general insurance business.
IG2.33 Where, pursuant to a structured settlement arrangement falling within one of the
cases referred to in sections 731 to 734 of the Income Tax (Trading and Other
Income) Act 2005, either:
(a) an annuity is purchased by a general insurance undertaking under which the
structured settlement beneficiary is the annuitant; or
(b) an annuity previously purchased by a general insurance undertaking for its own
account to fund the periodic payments under a structured settlement agreement
is assigned to the structured settlement beneficiary,
the general insurance company will normally remain liable to the policyholder should
the annuity provider fail. An annuity, paid by an annuity provider, which exactly
matches the amount and timing of this liability should be recognised as an asset and
measured at the same amount as the related obligation.
Deferred acquisition costs
of Schedule 3 to the Regulations to general insurance business.
IG2.34 Acquisition costs should be deferred commensurate with the unearned premiums
provision. The proportion of acquisition costs to be deferred will be the same
proportion of the total acquisition costs as the ratio of unearned premiums to gross
written premiums for the class of business in question. For this purpose acquisition

expenses should be allocated to classes of business. Where this is not possible for
reinsurance business inwards an estimate should be made.
IG2.35 Advertising costs should not be deferred unless they are directly attributable to the
acquisition of new business.
IG2.36 Related reinsurance commissions deferred should not be netted against deferred
acquisition costs but should be shown as liabilities in the statement of financial
position.
Insurance business in run off
Paragraph IG2.37 provides guidance for applying the principles of Section 21 Provisions and
Contingencies of FRS 102. It is relevant to general insurance business and to long-term
insurance business.
IG2.37 Where a decision has been taken to cease writing the whole, or a material category, of
the insurance business, that business does not constitute a discontinued operation,
but it may be a restructuring to which paragraphs 21.11C and 21.11D of FRS 102
apply.
Technical provisions
Paragraph IG2.38 provides guidance for applying the requirements of Part 1 General Rules
and Formats of Schedule 3 to the Regulations. This paragraph is only relevant to long-term
insurance business.
IG2.38 Balance sheet liabilities item C.4 (Provision for bonuses and rebates) and line II.7
(Bonuses and rebates, net of reinsurance) in the technical account for long-term
business should not be used. Bonuses and rebates attributable to the reporting
period, other than those included within claims payable, should be included in
line II.6(a) (Change in other technical provisions – long term business provision) and in
Balance Sheet Liabilities item C.2 (Long term business provision).
Long-term business provision
of Schedule 3 to the Regulations. They are only relevant to long-term insurance business.
IG2.39 The gross premium method should be used for every class of insurance business
except those for which the net premium method is used in the related regulatory
returns, but policyholder liabilities of overseas subsidiaries may be computed on a
local basis, subject to Part 3 of Schedule 6 to the Regulations.
IG2.40 Where the valuation is performed using a net premium method, bonuses should be
included in the long-term business provision only if they have vested or have been
declared as a result of the current valuation.
IG2.41 Liabilities should be measured on a basis consistent with the bases adopted for
valuing the corresponding assets. In determining the long-term business provision and
the technical provision for linked liabilities, no policy may have an overall negative
provision except as allowed by PRA rules, or a provision which is less than any
guaranteed surrender or transfer value.

IG2.42 The long-term business provision may be calculated on the basis used for regulatory
reporting subject to appropriate adjustments including the reversal of any reduction in
policyholder liabilities where these liabilities already implicitly take account of a
pension fund surplus through future expense assumptions which reflect lower
expected contributions.
IG2.43 Paragraph 52(2) of Schedule 3 to the Regulations requires that a summary of the
principal assumptions in making the long-term business provision shall be given in the
notes to the financial statements. In order to comply with this requirement an entity
should disclose for each principal category of business the more significant
assumptions relating to the following:
(a) premiums;
(b) persistency;
(c) mortality and morbidity;
(d) interest rates;
(e) the discount rates used with, if relevant, explanation of the basis of reflecting risk
margins; and
(f) if applicable, any other significant factors.
IG2.44 Where the long-term business provision has been determined on an actuarial basis
that, in assessing the future net cash flows, has regard to the timing of tax relief where
assumed expenses exceed attributable income, such tax relief should be excluded
from the determination of deferred tax.
Paragraphs IG2.45 and IG2.46 provide guidance for applying the requirements of Section 5 of
FRS 103. They are only relevant to long-term insurance business.
IG2.45 For each significant class of with-profits insurance business, the insurer should
disclose the extent to which the basis of preparation of the long-term business
provision incorporates allowance for future bonuses. For example, it should be stated
(if it is the case) that explicit provision is made only for vested bonuses (including those
vesting following the current valuation) and that no such provision is made for future
regular or terminal bonuses. If practical, insurers should disclose the amount that has
been included explicitly in the long-term business provision in relation to future
bonuses provided this can be done without undue cost or effort. If the valuation
method makes implicit allowance for future bonuses by adjusting the discount rate
used or by another method, this fact should be stated together with a broad description
of the means by which such allowance is made.
IG2.46 The aggregate of the bonuses added to policies in the reporting period should be
disclosed in the notes to the financial statements.
Technical provisions for linked liabilities
Paragraphs IG2.47 to IG2.49 provide guidance for applying the requirements of note 26 of the
Notes on the Balance Sheet format in Schedule 3 to the Regulations. They are only relevant to
long-term insurance business.
IG2.47 The relevant provision for any contract should not be less than the element of any
surrender or transfer value which is calculated by reference to the relevant fund or
funds or index.

IG2.48 The net assets held to cover linked liabilities at the reporting date may differ from the
technical provisions for linked liabilities. The reasons for any significant mismatching
should be disclosed.
IG2.49 Where the technical provision for linked liabilities has regard to the timing of the tax
obligation, the effect of this should be excluded from the determination of deferred tax.
Fund for future appropriations
Paragraphs IG2.50 and IG2.51 provide guidance for applying the requirements of note 19 of
the Notes on the Balance Sheet format in Schedule 3 to the Regulations. They are only
relevant to long-term insurance business.
IG2.50 In the case of funds where there is reasonable certainty over the allocation to
policyholders or to owners of all items recognised in the technical account for
long-term business, it is inappropriate to establish a fund for future appropriations
(FFA). However, certain long-term business funds of:
(a) proprietary insurers are established in such a way that allocation between equity
and policyholders’ liabilities is not clear cut; and
(b) mutual insurers are established in such a way that allocation between disclosed
surplus and policyholders’ liabilities is not clear cut; and
therefore it is appropriate to establish a FFA.
IG2.51 Where a FFA is established, the notes to the financial statements should indicate the
reasons for its use and the nature of the funds involved.
Reserves relating to long-term business
Paragraphs IG2.52 and IG2.53 provide guidance for applying the requirements of
paragraph 52 of Schedule 3 to the Regulations. They are only relevant to long-term
insurance business.
IG2.52 Investment reserves (realised and unrealised investment gains and exchange gains),
surpluses carried forward, resilience and similar reserves, contingency and closed
fund reserves which may be included in the statutory liabilities for solvency purposes
under the PRA rules, should be considered to assess the extent to which they should
be included in the long-term business provision (see paragraph IG2.42).
IG2.53 The investment return (which includes movements in realised and unrealised
investment gains and losses) and related tax charges on assets representing
reserves which are held for the relevant long-term insurance business for solvency
purposes should be credited to the technical account for long-term business.
Allocations may then be made as appropriate to the non-technical account in
accordance with paragraphs IG2.65 and IG2.66 or to the FFA. When the regulatory
framework does not require the entity to set up a long-term fund for its long-term
insurance business, the entity shall make the allocations as appropriate between the
technical and non-technical account and disclose the basis of its allocation in the notes
to the financial statements.

Present value of acquired in-force business
Paragraphs IG2.54 and IG2.55 provide guidance for applying the principles of Section 18
Intangible Assets other than Goodwill and Section 19 Business Combinations and Goodwill of
FRS 102, and paragraphs 2.27 to 2.29 and 3.16 to 3.18 of FRS 103. They are only relevant to
IG2.54 An entity shall provide the disclosures set out in paragraphs 18.27 and 18.28(a) of
FRS 102 in relation to the value of in-force life assurance business (VIF) asset.
IG2.55 Where a group reconstruction occurs and the new group carries on substantially the
same insurance business as the group which it replaces (for example where a
demutualisation is effected through the establishment of a proprietary company to
acquire the business of an existing mutual insurer), any VIF which would be regarded
as internally-generated under the former group structure should continue to be treated
as such in the new group.
Disaggregated information about single and regular premiums
Paragraphs IG2.56 to IG2.58 are only relevant to long-term insurance business.
IG2.56 New life insurance premiums are defined in the PRA rules as following:
‘Single premium contracts shall consist of those contracts under which there is no
expectation of continuing premiums being paid at regular intervals. Additional single
premiums paid in respect of existing individual contracts shall be included.
Regular premium contracts shall include those contracts under which premiums are
payable at regular intervals during the policy year, including repeated or recurrent
single premiums where the level of premiums is defined’.
IG2.57 New annual and single premiums should be disclosed separately in the financial
statements together with an explanation of the basis adopted for recognising
premiums as either annual or single premiums. New annual premiums should be
shown as the premiums payable in a full year (ie annual equivalent premium).
Department for Work and Pensions rebates received on certain pensions contracts
should be treated as single premiums.
IG2.58 Internal transfers between products where open market options are available should
be counted as new business. If no open market option exists, the transfer should not
be treated as new business.
Income statement (referred to as the profit and loss account in the Act)
Paragraphs IG2.59 and IG2.60 provide guidance for applying the requirements of Part 1
General Rules and Formats of Schedule 3 to the Regulations, and the requirements of
paragraphs 3.5 and 9.13(a) of FRS 102. They are relevant to general insurance business and
to long-term insurance business.
IG2.59 Where the amounts of general or long-term business are not material, the results
should be disclosed as ‘other technical income, net of reinsurance’ or ‘other technical
charges, net of reinsurance’ in the technical account for the business which is material.
Appropriate additional disclosure should be made in the notes to the financial
statements in relation to the business accounted for in this way.

IG2.60 On consolidation, the profit or loss of any non-insurance entity belonging to the
long-term fund (as defined in INSPRU as at 31 December 2015) may be included
directly in the technical account for long-term business. Where material, more detailed
disclosure should be provided in the notes to the financial statements. Where an entity
carrying on general insurance business is an asset of the long-term insurance
business, the profit or loss of this business should be transferred from the
non-technical account to the technical account for long-term business using new
lines for this purpose.
Valuation of reinsurance asset
Paragraph IG2.61 provides guidance on the application of Section 2 Concepts and Pervasive
Principles of FRS 102.
IG2.61 Assets created by reinsurance transactions should be measured on a basis consistent

with the measurement of the related liability, so that the net amount reflects the
exposure of the entity. Changing the measurement of the liability may therefore give
rise to a change in the related reinsurance asset. An exception to this paragraph is
where a provision is made for any shortfall in value (eg any anticipated inability on the
part of the reinsurer to meet its obligations to the cedant, when they are expected to
fall due).
Reinsurance balance
Paragraph IG2.62 provides guidance for applying the requirements of paragraphs 85(1)(e) and
86(1)(b) of Schedule 3 to the Regulations. It is relevant to general insurance business and to
IG2.62 For the purpose of the disclosure required under paragraphs 85 and 86 of Schedule 3
to the Regulations, the ‘reinsurance balance’ means for general business the
aggregate total of all those items included in the technical account for general
business which relate to reinsurance outwards transactions including items recorded
under item I.7(d) (Reinsurance Commissions and Profit Participation) and for
long-term insurance business the corresponding items in the technical account for
long-term business including items recorded under item II.8(d) (Reinsurance
Commissions and Profit Participation).
Allocation of investment return
Paragraphs IG2.63 to IG2.71 provide guidance for applying the requirements of note 10 of the
Notes on the Profit and Loss Account format in Schedule 3 of the Regulations.
IG2.63 For the purpose of calculating the longer term rate of investment return, it may be
appropriate to spread the realised gains or losses over the period to maturity (or
deemed maturity) of the investments sold (see paragraph IG2.76).
IG2.64 FRS 103 permits, but does not require, a form of presentation which enables users of
the financial statements to identify operating profit or loss based on the longer term
rate of investment return. This return may be recorded within the general business and
long-term business technical accounts and may also be disclosed separately as part of
the total operating profit.
IG2.65 Where investment return is allocated, it should be on one of the following bases:
(a) the longer term rate of return basis (see paragraphs IG2.67 to IG2.70); or

(b) an allocation of the actual investment return on investments supporting the
general insurance technical provisions and associated equity should be made
from the non-technical account to the technical account for general business.
IG2.66 To ensure consistency of treatment in the case of an entity transacting both general
and long-term insurance business:
(a) where the longer term rate of return basis is used, it must be applied to both the
general and long-term insurance business; and
(b) where an allocation of the actual investment return on investments supporting
the general business technical provisions and associated equity is made from
the non-technical account to the technical account for general business, no
allocation of investment return should be made from the technical account for
long-term business to the non-technical account.
Longer term rate of return basis
IG2.67 The allocation of investment return from the technical account for long-term business
to the non-technical account should be such that the investment return remaining in
the technical account for long-term business on investments directly attributable to
owners reflects the longer term rate of return on these investments.
IG2.68 The allocation from the non-technical account to the technical account for general
business should be based on the longer term rate of investment return on investments
supporting the general insurance technical provisions and all the relevant equity.
IG2.69 Where it is necessary for the purpose of reflecting the longer term rate of investment
return in the technical account for general business, the allocation referred to in
paragraph IG2.68 may exceed the actual investment return of the reporting period on
the corresponding investments. Similarly, the allocation referred to in
paragraph IG2.67 may be of a negative amount which increases rather than
decreases the amount of investment return included in the long-term business
technical account.
IG2.70 The allocation referred to in paragraph IG2.67 should be included in the long-term
business technical account and the non-technical account gross of any attributable
tax. The tax attributable to the allocated investment return should be deducted from
the tax attributable to long-term business and added to the tax on profit or loss on
ordinary activities.
Disclosure
IG2.71 Where technical results are disclosed which reflect the longer term rate of investment
return, the following disclosures should be made in the notes to the financial
statements:
(a) the methodology used to determine the longer term rate of return for each
investment category;
(b) for each investment category and material currency, both the longer term rates
of return and, if applicable, the long-term dividend and rental yields used to
calculate the grossing-up factor for equities and property;
(c) a comparison over a longer term (at least five years) of the actual return
achieved with the return allocated using the longer term rate of return analysed
between returns relating to general business, long-term business and other; and
(d) the sensitivity of the longer term investment return to a 1 per cent decrease and
a 1 per cent increase in the longer term rate of investment return.

The longer term rate of investment return
Paragraphs IG2.72 to IG2.77 provide guidance on applying the requirements of

paragraphs IG2.67 to IG2.70.
Equities and properties
IG2.72 The longer term investment return on equities and properties should be determined
using one of the following methods:
(a) Grossing-up actual income earned for each asset class by a factor representing
the longer term rate of investment return divided by an assumed long-term
dividend or rental yield (based on the assumption that income will reflect the mix
of assets held during the reporting period). Adjustments will be required for
special factors which may distort the underlying yields of the portfolio such as (in
the case of equities), special or stock dividends and share buy-backs.
(b) Applying the longer term rate of return to investible assets held during the period
(taking account of new money invested and changes in portfolio mix) by
reference to the quarterly or monthly weighted average of each group of assets
after excluding the effect of short-term market movements.
IG2.73 The longer term rate of return should be determined separately for equities and
property and for each material currency in which relevant investments are held.
IG2.74 Taking into account the investment policy followed by the entity, the longer term rate of
investment return should reflect a combination of historical experience and current
market expectations for each geographical area and each category of investments.
The rates chosen should be best estimates based on historical market real rates of
return and current inflation expectations, having regard, where appropriate, to the
following factors:
(a) comparison of the business’s actual returns and market returns over the
previous five years or such longer period as may be appropriate;
(b) longer term rates of return currently used in the business for other purposes, for
example, product pricing, with-profits bonus policy, and pensions funding;
(c) the rate used for the purpose of achieved profits method reporting;
(d) consensus economic and investment market forecasts of investment returns;
and
(e) any political and economic factors which may influence current returns.
IG2.75 Rates of return should be set with a view to ensuring that longer term returns credited
to operating results do not consistently exceed or fall below actual returns being
earned. Any downturn in expectations of longer term returns should be recognised
immediately by reducing the assumed rate of return. Rates used should be reviewed at
least annually although changes would be expected to be infrequent.
Fixed income securities
IG2.76 In the case of redeemable fixed income securities, the longer term rate of return may
be determined by using either:
(a) a redemption yield calculated so that any excess of the purchase price over the
amount repayable on maturity is recognised in profit or loss by instalments so
that it is written off by the time that the security is redeemed; or
(b) amortised cost with realised gains and losses subject to continuing
amortisation over the remaining period to the maturity date.

However, it may be based on interest earned where the net effect of amortisation
would be immaterial. In the case of irredeemable fixed interest securities and
short-term assets, the allocated longer term rate of investment return should be the
interest income receivable in respect of the reporting period.
Derivatives
IG2.77 Where derivatives have a material effect and are used to adjust exposure to the
various classes of investments, the calculation of the longer term rate of return in
paragraphs IG2.72 to IG2.75 should be adjusted to reflect the underlying economic
exposure.
Investments in Unit Trusts/Open Ended Investment Companies (OEICs)
Paragraph IG2.78 provides guidance for applying the requirements of Part 1 General Rules and
Formats of Schedule 3 to the Regulations and paragraph 11.41 of FRS 102.
IG2.78 Except for investments held to cover linked liabilities all investments in unit trusts and
OEICs should be included in the balance sheet under assets item C.III.1 (Shares and
other variable yield securities and units in unit trusts) regardless of the nature of the
underlying assets of the unit trusts.
Attributing tax to the transfer to the non-technical account
Paragraphs IG2.79 and IG2.80 provide guidance on applying the requirements of Part 1
General Rules and Formats of Schedule 3 to the Regulations. Paragraph IG2.81 provides
guidance on applying the requirements of paragraph 29.27(b) of FRS 102.
IG2.79 In common with other types of business, taxable profits for UK entities3 with long-term
insurance business are now derived from pre-tax profits reported in the financial
statements. However, the requirement for tax expense (income) to be allocated to the
same account (technical or non-technical) as the transaction or other event that
resulted in the tax expense (income) means that the amount shown in the
non-technical account as the transfer from (to) the long-term business technical
account is net of tax. There is therefore a requirement for the tax attributable to the
transfer to be brought into account in arriving at profit before tax in the non-technical
account.
IG2.80 Entities should determine the amount to be brought into account in the non-technical
account in respect of the transfer from (to) the long-term business technical account
using a method which is consistent with the approach in paragraph 29.22 of FRS 102
and which fairly represents that part of the tax expense (income) in the long-term
business technical account which is based on pre-tax accounting profits or on timing
differences in the recognition of such profits for accounting and tax purposes.
IG2.81 The reconciliation required by paragraph 29.27(b) of FRS 102 should apply only to the
tax expense (income) that appears in the non-technical account.
3
And for Irish entities.

Appendix to Implementation Guidance Section 2
Republic of Ireland legal references
The table below should be read in conjunction with Appendix IV of FRS 103.
Paragraph UK references RoI references
Title page, Schedule 3 to the Regulations Insurance Undertakings

paragraph (i) of the Regulations 2015 (as amended)
Overview and page 5
Sub-heading before Paragraph 54 of Schedule 3 to the Paragraph 59(2) and 59(3) of Part IV
IG2.14 and IG2.14 Regulations of Schedule 1 to the Insurance
Undertakings Regulations 2015 (as
amended)
IG2.19, IG2.30 Note 4 of the Notes on the Profit and Note 4 of the Notes on the Profit and
Loss Account format in Schedule 3 Loss Account formats in Section B
to the Regulations of Part II of Schedule 1 to the
Insurance Undertakings
Regulations 2015 (as amended)
Sub-heading before Note 24 of the Notes on the Balance Note 27 of the Notes on the Balance
IG2.28 Sheet format in Schedule 3 to the Sheet format in Section B of Part II
Regulations of Schedule 1 to the Insurance
amended)
IG2.28(b) Schedule 3 to the Regulations Insurance Undertakings

IG2.33 Sections 731 to 734 of the Income There is no corresponding Irish

Tax (Trading and Other Income) Act legislation.
2005
Sub-heading before Paragraph 13 of Schedule 3 to the Note 15 of the Notes on the Balance
IG2.34 Regulations Sheet format in Section B of Part II
of Schedule 1 to the Insurance
amended)
Sub-heading before Part 1 General Rules and Formats Sections A and B of Part II of
IG2.38 of Schedule 3 to the Regulations Schedule 1 to the Insurance
amended)
IG2.38 ‘Balance sheet liabilities item C.4 Liabilities item C.4 in the Balance
(provision for bonuses and rebates)’ Sheet format in Section B of Part II
amended)
IG2.38 ‘line II.7 (Bonuses and rebates, net Line II.7 in the Profit and Loss
of reinsurance)’ Account formats in Section B of
Part II of Schedule 1 to the
Insurance Undertakings Regulations
2015 (as amended)

IG2.38 ‘line II.6(a) (Change in other Line II.6(a) in the Profit and Loss
technical provisions – long term Account formats in Section B of
business provision)’ Part II of Schedule 1 to the
Insurance Undertakings Regulations
2015 (as amended)
IG2.38 ‘Balance Sheet Liabilities item C.2 Liabilities item C.2 in the Balance
(Long term business provision)’ Sheet format in Section B of Part II
amended)
Sub-heading before Paragraph 52 of Schedule 3 to the Paragraph 57 of Part IV of

IG2.39 Regulations Schedule 1 to the Insurance
amended)
IG2.39 Part 3 of Schedule 6 to the Schedule 2 to the Insurance

Regulations Undertakings Regulations 2015 (as
amended)
IG2.43 Paragraph 52(2) of Schedule 3 to Paragraph 57(3) of Part IV of

the Regulations Schedule 1 to the Insurance
amended)
amended)
amended)
Sub-heading before Paragraph 52 of Schedule 3 to the Paragraph 57 of Part IV of

IG2.52 Regulations Schedule 1 to the Insurance
amended)
amended)
Sub-heading before Paragraphs 85(1)(e) and 86(1)(b) of Paragraphs 84(1)(e) and 85(1)(b) of
IG2.62 Schedule 3 to the Regulations Part V of Schedule 1 to the
IG2.62 Paragraphs 85 and 86 of Paragraphs 84 and 85 of Part V of

Schedule 3 to the Regulations Schedule 1 to the Insurance
amended)

IG2.62 ‘items included in the technical Item I.7(d) in the Technical Account
account for general business which – Non-life insurance in the Profit and
relate to reinsurance outwards Loss account formats in Section B
transactions including items of Part II of Schedule 1 to the
recorded under item I.7(d) Insurance Undertakings Regulations
(Reinsurance Commissions and 2015 (as amended)
Profit Participation)’
IG2.62 ‘for long-term insurance business Item II.8(d) in the Technical Account
the corresponding items in the – Life assurance business in the
technical account for long-term Profit and Loss account formats in
business including items recorded Section B of Part II of Schedule 1 to
under item II.8(d) (Reinsurance the Insurance Undertakings
Commissions and Profit Regulations 2015 (as amended)
Participation)’
Sub-heading before Note 10 of the Notes on the Profit Note 9 of the Notes on the Profit and
IG2.63 and Loss Account format in Loss Account formats in Section B
Schedule 3 to the Regulations of Part II of Schedule 1 to the
amended)
IG2.78 ‘assets item C.III.1 (Shares and Assets item C.III.1 in the Balance
other variable yield securities and Sheet format in Section B of Part II
units in unit trusts’ of Schedule 1 to the Insurance
amended)
amended)

Guidance on capital disclosures for entities with long-term insurance
business
This guidance accompanies, but is not part of, FRS 103. It provides guidance for providing
capital disclosures in accordance with paragraph 34.31 of FRS 102. It is only relevant to
entities with long-term insurance business.
Capital statement
IG3.1 An entity should present a statement setting out its total regulatory capital resources
relating to long-term insurance business. The statement should show, for each
section of that business as defined in paragraph IG3.3:
(a) equity (or in the case of a mutual, the equivalent, often described as disclosed
surplus);
(b) adjustments to restate these amounts in accordance with regulatory
requirements;
(c) each additional component of capital included for regulatory purposes, including
capital retained within a life fund whether attributable to shareholders,
policyholders or not yet allocated between shareholders and policyholders;
and
(d) the total capital available to meet regulatory capital requirements.
IG3.2 Available capital will comprise a number of distinct elements, each of which will be
separately disclosed, including:
(a) equity as included in the published statement of financial position,
represented by surplus held within a life fund or by assets held separately
from those of the fund itself;
(b) amounts that are wholly attributable to owners, but held within a life fund and
where the distribution out of the fund is restricted by regulatory or other
considerations;
(c) surplus held in life funds that has yet to be attributed or allocated between
owners and policyholders (in the case of a mutual all such surplus is attributable
to policyholders but is not treated as a liability); and
(d) qualifying debt capital, whether issued by the life entity itself or by another entity
within the group.
IG3.3 The capital statement should show as separate sections:

(a) each UK with-profits life fund4 that is material to the group; and
(b) the entity’s other long-term insurance business, showing the extent to which the
various components of capital are subject to constraints such that they are
available to meet requirements in only part of the entity’s business, or are
available to meet risks and regulatory capital requirements in all parts of the
business.
IG3.4 The purpose of the capital statement is to set out the financial strength of the entity
and to provide an analysis of the nature of capital, and constraints over the availability
of the capital to meet risks and regulatory requirements. It is important that sources of
4
Or, for an entity in the Republic of Ireland, each with-profits fund in the Republic of Ireland.

capital are shown separately and the extent to which the capital in each section is
subject to constraint in its availability to meet requirements in other parts of the entity.
Such constraints can arise for any of the following reasons:
(a) Ownership – the capital may be subject to specific ownership considerations (for
example, the fund for future appropriations (FFA) of a UK with-profits fund5,
for which the allocation between policyholders and shareholders has not been
determined);
(b) Regulatory – local regulatory limitations may require the maintenance of
solvency margins in particular funds or countries; or
(c) Financial – the availability of capital in certain cases can be restricted due to the
imposition of taxes or other financial penalty in the event of the capital being
required to be redeployed across the group.
IG3.5 The aggregate amount of regulatory capital resources included in the capital
statement should be reconciled to equity, FFA and other amounts shown in the
entity’s statement of financial position, showing separately for each component of
capital the amount relating to the entity’s business other than long-term insurance
business. Where such other business is significant, an explanation should be given of
the extent to which this capital can be used to meet the requirements of the life
assurance business.
IG3.6 Although the detailed requirements apply to long-term insurance business, entities will
need to incorporate information on other parts of the business, together with
consolidation adjustments, in order to demonstrate how the aggregated capital
attributed to the long-term insurance business reconciles to the total shown in the
consolidated statement of financial position, and the extent to which capital outside the
long-term insurance business may be made available to meet the capital requirements
of the long-term insurance business. This reconciliation applies to each different type
of capital shown in the capital statement.
IG3.7 Where the entity is a subsidiary, narrative supporting the capital statement should
explain the extent to which the capital of the entity is able to be transferred to a parent
or fellow subsidiaries, or the extent to which it is required to be retained within the
entity.
IG3.8 Entities with life assurance liabilities should reconcile their regulatory capital resources
to their shareholders’ funds. Adjustments to reconcile the capital shown in the
statement of financial position to the amount for regulatory purposes may include the
following:
(a) the difference between provisions measured on the realistic basis and the
regulatory basis;
(b) the inclusion in capital of the FFA;
(c) the exclusion from capital of the shareholders’ share of accrued bonus;
(d) the exclusion of goodwill and other intangible assets, such as an amount
attributed to the acquired value of in-force life assurance business (VIF); and
(e) changes to the valuation of assets and the exclusion of certain non-admissible
assets for regulatory purposes, for example any regulatory adjustment to a
pension fund deficit that is recognised as a liability.
5
Or, for an entity in the Republic of Ireland, each with-profits fund in the Republic of Ireland.

Disclosure of these adjustments should be sufficient to give a clear picture of the
capital position from a regulatory perspective and its relationship to the equity shown in
the consolidated statement of financial position.
IG3.9 Where the amount of a capital instrument that qualifies for inclusion as regulatory
capital is restricted (for example, where a limited percentage of total regulatory capital
may be in the form of debt) the full amount of the instrument should be included, with a
separate deduction for the amount in excess of the restriction.
IG3.10 Disclosure should be made of any formal intragroup arrangements to provide capital to
particular funds or business units, including intragroup loans and contingent
arrangements. Where the entity is a subsidiary, disclosure should also be made of
similar arrangements between the entity and a parent or fellow subsidiary.
IG3.11 Separate disclosure of each class of capital is important to an understanding of the

funding of the business and the way any future losses would be absorbed or new
business financed. Regulatory capital can include both equity and surplus within the
fund. Such surplus may be wholly attributable to owners, or remain unallocated as part
of the FFA. In a mutual fund, all surplus is attributable to policyholders. Debt
instruments qualifying as capital may be also be issued from the fund itself, or may
form part of the owners’ equity outside the life fund; a debt instrument issued by the
fund to the owners may effectively transfer capital from the owners to the fund.
IG3.12 Intragroup arrangements should be included in the regulatory capital of a section only
where they are subject to formal arrangements.
Disclosures relating to liabilities and capital
IG3.13 The capital statement should be supported by the following disclosures:

(a) narrative or quantified information on the regulatory capital requirements
applying to each section of the business shown in the capital statement, and
on the capital targets set by management for that section;
(b) narrative disclosure of the basis of determining regulatory capital and the
corresponding regulatory capital requirements, and any major inconsistencies in
this basis between the different sections of the business;
(c) narrative disclosure showing the sensitivity of regulatory liabilities (including
options and guarantees), and the components of total capital, to changes in
market conditions, key assumptions and other variables, as well as future
management actions in response to changes in market conditions; and
(d) narrative disclosure of the entity’s capital management policies and objectives,
and its approach to managing the risks that would affect the capital position.
These disclosures are important to the user’s ability to understand the management of
capital by the entity, its financial adaptability in changing circumstances, and the
resources available to each group of policyholders.
IG3.14 In relation to liabilities arising from long-term insurance business, the entity should
include the following additional information:
(a) the process used to determine the assumptions that have the greatest effect on
the measurement of liabilities including options and guarantees and, where
practicable, quantified disclosure of those assumptions;
(b) those terms and conditions of options and guarantees relating to long-term
insurance contracts that could in aggregate have a material effect on the
amount, timing and uncertainty of the entity’s future cash flows; and

(c) information about exposures to interest rate risk or market risk under options
and guarantees if the entity does not measure these at fair value or at an
amount estimated using a market-consistent stochastic model.
IG3.15 Although it is important to explain all movements in liabilities and capital during the
period that are material to the group, this does not imply that the impact of each
change in assumption needs to be shown separately. Where there is a common cause
for the change of assumption the impacts can be grouped together. As an example,
the impact of changes in investment return attributable to changing market
circumstances does not need to be broken down between the various classes of
investment.
IG3.16 The description of the process would include the objective (whether a best estimate or
a given level of assurance is intended); the sources of data; whether assumptions are
consistent with observable market data or other published information; how past
experience, current conditions and future trends are taken into account; correlations
between different assumptions; management’s policy for future bonuses; and the
nature and extent of uncertainties affecting the assumptions.
IG3.17 Options and guarantees are features of life assurance contracts that:
(a) confer potentially valuable guarantees underlying the level or nature of
policyholder benefits; or
(b) are options to change these benefits exercisable at the discretion of the
policyholder.
For the purposes of FRS 103, the term is used to refer only to those options and
guarantees whose potential value is affected by the behaviour of financial variables,
and not to potential changes in policyholder benefits arising solely from insurance
risk (including mortality and morbidity), or from changes in the entity’s
creditworthiness. It includes a financial guarantee or option that applies if a policy
lapses, but does not include the option to surrender or allow a policy to lapse.
IG3.18 To comply with paragraph IG3.14(c), an insurer should disclose:

(a) a description of the nature and extent of the options and guarantees;
(b) the basis of measurement for the amount at which these options and guarantees
are stated, and the amount included, if any, for the additional payment that may
arise in excess of the amounts expected to be paid if the policies did not include
the option or guarantee feature;
(c) the main variables that determine the amount payable under the option or
guarantee; and
(d) information on the potential effects of adverse changes in those market
conditions that affect the entity’s obligations under options and guarantees.
IG3.19 The requirement of paragraph IG3.18(d) may be met by disclosing:

(a) for options and guarantees that would result in additional payments to
policyholders if current asset values and market rates continued unchanged
(ie those that are ‘in the money’ for the policyholder), an indication of the change
in these amounts if the variables moved adversely by a stated amount; and
(b) for options and guarantees that would result in additional payments to
policyholders only if there was an adverse change in current asset values and
market rates (ie those that are ‘out of the money’ for the policyholder):

(i) an indication of the change in these variables, from current levels, which
would cause material amounts to become payable under the options and
guarantees; and
(ii) an indication of the amount that would result from a specified adverse
change in these variables from the levels at which amounts first become
payable under the options and guarantees.
The above disclosures may be made in aggregate for classes of options and
guarantees that do not differ materially, or which are not individually material.
IG3.20 The capital statement should show the amount of policyholder liabilities attributed to
each section of the business shown in the statement, analysed between:
(a) with-profits business;
(b) linked business;
(c) other long-term insurance business; and
(d) insurance business accounted for as financial instruments in accordance with
the requirements of Sections 11 Basic Financial Instruments and 12 Other
Financial Instruments Issues of FRS 102.
The total of these policyholder liabilities should be the amounts shown in the entity’s
statement of financial position.
Movements in capital
IG3.21 An entity should include a reconciliation of the movements in the total amount of
available capital for long-term insurance business shown in the capital statement from
the comparative amounts at the end of the previous reporting period. This disclosure
should cover individually each UK life fund6 that is separately shown in the capital
statement required under paragraph IG3.1, and other long-term insurance business in
aggregate.
IG3.22 This disclosure should set out in tabular form the effect of changes resulting from:
(a) changes in assumptions used to measure liabilities from long-term insurance
business, showing separately the effect of each change in an assumption that
has had a material effect on the group;
(b) changes in management policy;
(c) changes in regulatory requirements and similar external developments; and
(d) new business and other factors (for example changing market prices affecting
assets and liabilities, surrenders, lapses and maturities), describing any material
items.
IG3.23 In paragraph IG3.22(b) changes in management policy refers to significant changes in

the management of the fund such as changes in investment policy or changes in the
use of the inherited estate. Where management actions are clearly directly related to
changes in assumptions or other factors it will be appropriate to show the net impact,
but the narrative should discuss the constituent factors. An example might be the
combined effect of a reduced level of bonuses assumed as a result of a reduction in
the assumed level of future investment return and a reduction in investment returns
earned in the period.
6
Or, for an entity in the Republic of Ireland, each life fund in the Republic of Ireland.

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Registered in England number 2486368. Registered Office:
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Guidance
Accounting and Reporting
January 2022
Contracts
z FRS 103;
z the requirements or principles of
Further copies, £18.00 (post-free) can be obtained from:

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Implementation Guidance To FRS 103 (January 2022)

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Financial Reporting Council

Further copies, £18.00 (post-free) can be obtained from:

Tel: 0845 370 1234

The FRC’s purpose is to serve the public interest by setting high

© The Financial Reporting Council Limited 2022

Implementation Guidance to accompany FRS 103 Insurance Contracts 5

Financial Reporting Council 1

Financial Reporting Council 3

Guidance for entities issuing insurance contracts on applying:

Financial Reporting Council 5

Recognition and measurement: with-proﬁts business

Measurement of with-proﬁts liabilities and related assets

6 Implementation Guidance to accompany FRS 103 (January 2022)

Financial Reporting Council 7

IG1.10 Where the amounts on a ‘realistic’ basis determined in accordance with

Policyholders’ options and guarantees

8 Implementation Guidance to accompany FRS 103 (January 2022)

Gross written premiums

IG2.1 Underwriting results should be determined on an annual basis, notwithstanding that

IG2.3 Regardless of the method by which commission is remitted (eg by an intermediary),

IG2.7 Additional or return premiums should be treated as a remeasurement of the initial

Financial Reporting Council 9

Claims handling expenses

IG2.14 Paragraph 54 of Schedule 3 to the Regulations permits explicit discounting subject

10 Implementation Guidance to accompany FRS 103 (January 2022)

IG2.15 Where applied, explicit discounting should normally be adopted by reference to

Unexpired risks provision

Paragraphs IG2.21 to IG2.27 provide guidance for applying the requirements of

Financial Reporting Council 11

12 Implementation Guidance to accompany FRS 103 (January 2022)

Portfolio premiums and claims

IG2.31 Similarly, the consideration receivable by the transferee undertaking should be

Paragraph IG2.33 provides guidance applying the requirements of paragraph 2.13(c) of

Deferred acquisition costs

Financial Reporting Council 13

Insurance business in run off

Long-term business provision

14 Implementation Guidance to accompany FRS 103 (January 2022)

Technical provisions for linked liabilities

Financial Reporting Council 15

Fund for future appropriations

therefore it is appropriate to establish a FFA.

Reserves relating to long-term business

16 Implementation Guidance to accompany FRS 103 (January 2022)

Disaggregated information about single and regular premiums

Paragraphs IG2.56 to IG2.58 are only relevant to long-term insurance business.

Financial Reporting Council 17

Valuation of reinsurance asset

IG2.61 Assets created by reinsurance transactions should be measured on a basis consistent

Allocation of investment return

18 Implementation Guidance to accompany FRS 103 (January 2022)

Longer term rate of return basis

Financial Reporting Council 19

Paragraphs IG2.72 to IG2.77 provide guidance on applying the requirements of

Equities and properties

Fixed income securities

20 Implementation Guidance to accompany FRS 103 (January 2022)