The Inland Revenue Authority of Singapore (IRAS) has agreed to accept the loss triangulation method, which elicits loss development patterns based on historical data collated in the form of basic loss development triangles, to arrive at the provision for IBNR claims for tax deduction purposes.
In an online guide titled “Tax Deductibility of General Insurers’ Reserves Against Incurred But Not Reported Claims (IBNR Claims) (Fourth Edition)”, IRAS says that for general insurance companies that are unable to collate historical data to enable them to use the loss triangulation method, it is prepared to consider alternative methods. In the e-Tax Guide, IRAS sets out the substitute methods, that may be used to derive an indication of what could be a reasonable level of reserves for IBNR claims, which are acceptable for tax deduction purposes.
Current Tax Treatment
The conceptual basis for allowing deduction of a provision for IBNR claims is that the actual claims subsequently received are capable of accurate estimation beforehand. Consequently, only provisions for IBNR claims which are made with methods using historical statistical evidence to arrive at the amount of such provisions which are considered as acceptable.
In other words, for provisions of IBNR claims to be acceptable, they must be supported by reliable statistical evidence. IRAS has been informed by MAS that a method widely used internationally to arrive at the provision for IBNR claims is the loss triangulation method which elicits loss development patterns based on historical data collated in the form of basic loss development triangles. As this basis of arriving at the provisions for IBNR claims is based on historical data, IRAS agreed to accept it.
Having done so, IRAS received further representations that there are general insurance companies which are unable to collate historical data to enable them to use the loss triangulation method because of the following reasons:
(a) unstable claims statistics;
(b) lack of historical data where the lines of business are new to the Singapore market;
(c) foreign insurers who lack Singapore claim statistics to provide for loss triangulation.
In view of the above reasons, IRAS is prepared to consider alternative methods.
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