SolvedGIM7090 | Equalisation reserves: classes other than credit business: ring-fencing: maximum level of reserve
From HM Revenue & Customs · General Insurance Manual
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 for 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 (see GIM7210) and the preceding four years (regardless of whether 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. Where, exceptionally, a financial year is shorter or longer than 12 months the annualised value of the premiums for that year is used in the calculation. So, if net premiums of £4,560,000 are written in a financial 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.
See GIM7040 for the relevant percentages for each business group.
If the maximum reserve level would be exceeded, an additional transfer out must take place to reduce the closing balance to the maximum reserve level. This transfer is not specific to any business group. This is demonstrated in the example below.
| - | Transfer in | Transfer out - abnormal loss | Maximum reserve level |
|---|---|---|---|
| Consequential loss: | £10 million | nil | £9 million |
| Marine and aviation | £20 million | nil | £40 million |
| Totals: | £30 million | nil | £49 million |
| Equalisation reserve b/f | £10 million | - | - |
| Potential reserve c/f | £40m, subject to a maximum of £49 million | - | - |
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 consequential loss business group maximum is well exceeded if looked at individually.
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 consequential loss business group within the total equalisation reserve benefits from spare capacity in the marine and aviation business group.