GIM7010 - Equalisation reserves: background

Regulatory rules

In the early 1990s there was concern that the British insurance industry should not be at a disadvantage compared to its competitors elsewhere in the EC, particularly in respect of the treatment of catastrophe reserves.

The Insurance Companies (Reserves) Act 1995 inserted a section 34A into the Insurance Companies Act 1982, and regulations made under this provision, 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 to be found in Chapter 7.5 of the Integrated Prudential Sourcebook (PRU – see GIM3100). There was some rewriting of the rules in PRU, which now refers to Equalisation Provisions (rather than Equalisation Reserves) and to ‘credit’ and ‘non-credit’ business (rather than ‘other than credit’ business). The broad arrangement of the rules remains essentially 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.