2 Significant accounting policies continued 2.10 Derivative financial instruments 2.13 Insurance contracts
2.9 Impairment of assets continued Derivatives are initially recognised at (a) Classification
fair value on the date on which a derivative The Group issues short-term casualty
(a) Non-financial assets contract is entered into and are and property insurance contracts that
Objective factors that are considered when subsequently valued at their fair value at transfer significant insurance risk. Such
determining whether a non-financial asset each balance sheet date. Fair values are contracts may also transfer a limited level
(such as goodwill, an intangible asset or item obtained from quoted market values and, if of financial risk.
of property, plant and equipment) or group these are not available, valuation techniques
of non-financial assets may be impaired including option pricing models as (b) Recognition and measurement
include, but are not limited to, the following: appropriate. The method of recognising the Gross premiums written comprise premiums
adverse economic, regulatory or resulting gain or loss depends on whether on business incepting in the financial year
environmental conditions that may the derivative is designated as a hedging together with adjustments to estimates
restrict future cash flows and asset instrument and, if so, the nature of the item of premiums written in prior accounting
usage and/or recoverability; being hedged. For derivatives not formally periods. Estimates are included for pipeline
the likelihood of accelerated designated as a hedging instrument, fair premiums and an allowance is also made
obsolescence arising from the value changes are recognised immediately for cancellations. Premiums are stated
development of new technologies in the income statement. Changes in the before the deduction of brokerage and
and products; and value of derivatives and other financial commission but net of taxes and duties
the disintegration of the active market(s) instruments formally designated as hedges levied. Premiums are recognised as revenue
to which the asset is related. of net investments in foreign operations (premiums earned) proportionally over the
are recognised in the currency translation period of coverage. The portion of premium
(b) Financial assets reserve to the extent they are effective; received on in-force contracts that relates
Objective factors that are considered when gains or losses relating to the ineffective to unexpired risks at the balance sheet date
determining whether a financial asset or portion of the hedging instruments are is reported as the unearned premium liability.
group of financial assets may be impaired recognised immediately in the consolidated
include, but are not limited to, the following: income statement. Claims and associated expenses are
negative rating agency announcements charged to profit or loss as incurred based
in respect of investment issuers, reinsurers The Group had no derivative instruments on the estimated liability for compensation
and debtors; designated for hedge accounting during owed to contract holders or third-parties
significant reported financial difficulties the current and prior financial year (see damaged by the contract holders. They
of investment issuers, reinsurers note 2.17). include direct and indirect claims settlement
and debtors; costs and arise from events that have
actual breaches of credit terms such as 2.11 Own shares occurred up to the balance sheet date even
persistent late payments or actual default; Where any Group company purchases if they have not yet been reported to the
the disintegration of the active market(s) the parent Company’s equity share capital Group. The Group does not discount its
in which a particular asset is traded (own shares), the consideration paid, liabilities for unpaid claims. Liabilities for
or deployed; including any directly attributable unpaid claims are estimated using the input
adverse economic or regulatory incremental costs (net of income taxes), of assessments for individual cases reported
conditions that may restrict future cash is deducted from equity attributable to the to the Group and statistical analysis for
flows and asset recoverability; and Company’s owners on consolidation. Where the claims incurred but not reported, and
the withdrawal of any guarantee from such shares are subsequently sold, reissued an estimate of the expected ultimate cost
statutory funds or sovereign agencies or otherwise disposed of, any consideration of more complex claims that may be affected
implicitly supporting the asset. received is included in equity attributable by external factors e.g. court decisions.
to the Company’s owners, net of any directly
(c) Impairment loss attributable incremental transaction costs (c) Deferred acquisition costs (DAC)
An impairment loss is recognised for the and the related tax effects. Commissions and other direct and indirect
amount by which the asset’s carrying amount costs that vary with and are related to
exceeds its recoverable amount. The 2.12 Revenue securing new contracts and renewing
recoverable amount is the higher of an asset’s Revenue comprises insurance and existing contracts are capitalised as deferred
fair value less costs to sell and value in use. reinsurance premiums earned on the acquisition costs. All other costs are
For the purpose of assessing impairment, rendering of insurance protection, recognised as expenses when incurred.
assets are grouped at the lowest levels net of reinsurance, together with profit DAC are amortised over the terms of the
for which there are separately identifiable commission, investment returns, agency insurance contracts as the related premium
cash flows (cash generating units). fees and other income inclusive of fair value is earned.
movements on derivative instruments not
Where an impairment loss subsequently formally designated for hedge accounting (d) Liability adequacy tests
reverses, the carrying amount of the asset treatment. The Group’s share of the results At each balance sheet date, liability
is increased to the revised estimate of of associates is reported separately. The adequacy tests are performed by each
its recoverable amount, but so that the accounting policies for insurance premiums segment of the Group to ensure the
increased carrying amount does not exceed are outlined below. Profit commission, adequacy of the contract liabilities net
the carrying amount that would have been investment income and other sources of of related DAC. In performing these tests,
determined had no impairment loss been income are recognised on an accruals basis current best estimates of future contractual
recognised for the asset in prior periods. net of any discounts and amounts such as cash flows and claims handling and
A reversal of an impairment loss is recognised sales-based taxes collected on behalf of administration expenses, as well as
as income immediately. Impairment losses third-parties. Profit commission is calculated investment income from assets backing
recognised in respect of goodwill are not and accrued based on the results of the such liabilities, are used. Any deficiency is
subsequently reversed. managed syndicate. immediately charged to profit or loss initially
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012 59