GIM7090 - Equalisation reserves: classes other than credit business: ring- fencing: maximum level of reserve

For each business group a maximum reserve level is calculated at the end of each year. This maximum reserve level is used in two ways:

• transfers out of a reserve in respect of a business group cannot exceed the maximum reserve level for that business group
• the total equalisation reserve carried forward at the end of the year cannot exceed the aggregate of the individual maximum reserves for each business group on which equalisation reserves are maintained.

The maximum reserve level is a set percentage of the average of the net written premiums of that group for the current financial year and the preceding four years (regardless of whether or not the company had an equalisation reserve in those years). If a company has carried on business in a particular group for less than 5 years the average of the net written premiums in respect of that year and any previous financial years during which the relevant business was written is taken instead. (The Guidance notes on the preparation of the annual return (IPRU(INS) Vol 3 Guidance Note 9.1 paragraph 11) authorised companies to ignore years ending before 23 December 1996 in making either of these calculations.) Where, exceptionally, a financial year is shorter or longer than 12 months the annualised value of the premiums for that year is used in this calculation. So, if net premiums of £4,560,000 are written in a “year” that is 456 days (15 months) long the net written premiums for that year for the purposes of the maximum reserve calculation will be taken as £3,650,000.

The relevant percentages for each business group are shown in GIM7040.

If the maximum reserve level would be exceeded an additional transfer out must be made to reduce the closing balance to equal the maximum reserve level. This transfer out is not specific to any business group - the reserve is viewed as a whole. This is demonstrated in the example below.

The total maximum reserve level is not exceeded, so no restriction of the amount carried forward is necessary. The net total of transfers in will be £30M, even though the ‘pecuniary loss’ business group maximum is clearly exceeded if looked at in its own right.

The comparison is between the reserve as it stands after transfers in or out (£40M), and the aggregate of the individual group maximum reserve levels (£49M). In effect, the ‘pecuniary loss’ business group within the total equalisation reserve benefits from spare capacity in the ‘marine and aviation’ business group.