RBS 2011 Annual Report Download - page 327

RBS Group 2011 325
General insurance claims
The Group makes provision for the full cost of settling outstanding claims
arising from its general insurance business at the balance sheet date,
including claims estimated to have been incurred but not yet reported at
that date and claims handling expenses. General insurance claims
provisions amounted to £6,219 million at 31 December 2011 (2010 -
£6,726 million; 2009 - £5,802 million).
Provisions are determined by management based on experience of
claims settled and on statistical models which require certain
assumptions to be made regarding the incidence, timing and amount of
claims and any specific factors such as adverse weather conditions.
Management use the work of internal and external actuaries to assess
the level of gross and net outstanding claims provisions required to adopt
ameasurement basis of reserves which result in a provision in excess of
actuarial best estimates. In order to calculate the total provision required,
the historical development of claims is analysed using statistical
methodology to extrapolate, within acceptable probability parameters, the
value of outstanding claims at the balance sheet date. Also included in
the estimation of outstanding claims are other assumptions such as the
inflationary factor used for bodily injury claims which is based on
historical trends and, therefore, allows for some increase due to changes
in common law and statute; and the incidence of periodical payment
orders and the rate at which payments under them are discounted. Costs
for both direct and indirect claims handling expenses are also included.
Outward reinsurance recoveries are accounted for in the same
accounting period as the direct claims to which they relate. The
outstanding claims provision is based on information available to
management and the eventual outcome may vary from the original
assessment. Actual claims experience may differ from the historical
pattern on which the estimate is based and the cost of settling individual
claims may exceed that assumed.
Deferred tax
The Group makes provision for deferred tax on temporary differences
where tax recognition occurs at a different time from accounting
recognition. Deferred tax assets of £3,878 million were recognised as at
31 December 2011 (2010 - £6,373 million; 2009 - £7,039 million).
The Group has recognised deferred tax assets in respect of losses,
principally in the UK, and temporary differences. Deferred tax assets are
recognised in respect of unused tax losses to the extent that it is probable
that there will be future taxable profits against which the losses can be
utilised. Business projections prepared for impairment reviews (see Note
17) indicate that sufficient future taxable income will be available against
which to offset these recognised deferred tax assets within six years
(2010 - eight years). The Group's cumulative losses are principally
attributable to the recent unparalleled market conditions. Deferred tax
assets of £3,246 million (2010 - £2,008 million; 2009 - £2,163 million)
have not been recognised in respect of tax losses carried forward in
jurisdictions where doubt exists over the availability of future taxable
profits.
Accounting developments
International Financial Reporting Standards
The IASB issued IFRS 9 ‘Financial Instruments’ in November 2009
simplifying the classification and measurement requirements in IAS 39 in
respect of financial assets. The standard reduces the measurement
categories for financial assets to two: fair value and amortised cost. A
financial asset is classified on the basis of the entity's business model for
managing the financial asset and the contractual cash flow characteristics
of the financial asset. Only assets with contractual terms that give rise to
cash flows on specified dates that are solely payments of principal and
interest on principal and which are held within a business model whose
objective is to hold assets in order to collect contractual cash flows are
classified as amortised cost. All other financial assets are measured at
fair value. Changes in the value of financial assets measured at fair value
are generally taken to profit or loss.
In October 2010, IFRS 9 was updated to include requirements in respect
of the classification and measurement of liabilities. These do not differ
markedly from those in IAS 39 except for the treatment of changes in the
fair value of financial liabilities that are designated as at fair value through
profit or loss attributable to own credit; these must be presented in other
comprehensive income.
In December 2010, the IASB issued amendments to IFRS 9 and to IFRS
7‘Financial Instruments: Disclosures’ delaying the effective date of IFRS
9 to annual periods beginning on or after 1 January 2015 and introducing
revised transitional arrangements including additional transition
disclosures. If an entity implements IFRS 9 in 2012 the amendments
permit it either to restate comparative periods or to provide the additional
disclosures. The additional transition disclosures must be given if
implementation takes place after 2012.
IFRS 9 makes major changes to the framework for the classification and
measurement of financial instruments and will have a significant effect on
the Group's financial statements. The Group is assessing the effect of
IFRS 9 which will depend on the outcome of the other phases of the
IASB's IAS 39 replacement project and on the outcome the IASB’s
tentative decision at its December 2011 meeting to reconsider the
following topics:
xadditional application guidance to clarify how the instrument
characteristics test was intended to be applied.
xbifurcation of financial assets, after considering any additional
guidance for the instrument characteristics test.
xexpanded use of other comprehensive income or a third business
model for some debt instruments.
‘Disclosures - Transfers of Financial Assets (Amendments to IFRS 7)’
was published by the IASB in October 2010. This replaces IFRS 7’s
existing derecognition disclosure requirements with disclosures about (a)
transferred assets that are not derecognised in their entirety and (b)
transferred assets that are derecognised in their entirety but where an
entity has continuing involvement in the transferred asset. The
amendments are effective for annual periods beginning on or after 1 July
2011.