GIM7120 - Equalisation reserves: credit business: limits and calculation

There is a separate statutory requirement for general insurers to maintain equalisation reserves for credit insurance business. These are different from those of the main scheme. Equalisation reserves for credit insurance business became a regulatory requirement in 1990, earlier than for the other lines of insurance business. New rules applied for accounting periods ending on or after 23 December 1996. These are given in PRU 7.5.38. The calculation of credit insurance equalisation reserves is:

• Transfers in - 75% of the technical surplus for the financial year subject to a maximum of 12% of the written premiums for that year, provided that the maximum reserve is not exceeded.
• Maximum reserve - 150% of the highest annual amount of premiums written in any year out of the last 5 years.
• Transfers out - 100% of any technical deficit for the year.

There is no requirement to make a transfer out of the credit insurance reserve if the reserve exceeds the permitted maximum as a result of a fall in the level of premium income.

So if, for example, the reserve at the start of the year is £1 million, there is a technical surplus of £100,000, and a maximum reserve at the year end of £960,000 no transfer will be made either to or from the reserve, which remains at £1 million.

Definitions

Technical surplus and technical deficit are defined:

• for business accounted for on an accident year basis, as the amount by which net premiums earned plus other technical income exceeds, or falls short of, net claims incurred, claims management costs and technical charges;
• for business accounted for on an underwriting year basis, as the amount by which net premiums written plus other technical income exceeds, or falls short of, net claims paid plus the increase (or less the decrease) in the net technical provisions (exclusive of any change in the credit insurance equalisation reserve) and net operating expenses.