GIM7010 - Equalisation reserves: background
Regulatory rules
In the early 1990s there was concern that the UK insurance industry should not be at a disadvantage to its competitors elsewhere in what is now the EU, particularly in relation to the treatment of profit smoothing and catastrophe reserves.
The Insurance Companies (Reserves) Act 1995 inserted a section 34A into the Insurance Companies Act 1982, and related regulations were made, the Insurance Companies (Reserves) Regulations 1996 (SI1996/646).
Following the enactment of the Financial Services and Markets Act 2000, section 34A and the regulations were replaced by chapter 6 of Volume 1 of the Interim Prudential Sourcebook and were renamed the equalisation reserves rules. The rules are now found in chapter 1.4 of the Prudential Sourcebook for Insurers (INSPRU - see GIM3100), and in the interim were in chapter 7.5 of the Integrated Prudential Sourcebook (PRU). There was some rewriting of the rules on movement into PRU, for example references to provisions rather than reserves, and to ‘credit’ and ‘non-credit’ business (rather than ‘other than credit’ business). The broad arrangement of the rules remains much the same.
Tax rules
The tax treatment of equalisation reserves maintained as a result of the Insurance Companies (Reserves) Act 1995 is governed by ICTA88/S444BA to ICTA88/S444BD (introduced by FA96/S166 and FA96/SCH32), and the Insurance Companies (Reserves) (Tax) Regulations 1996, SI1996/2991.
