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 an EU regulatory requirement, including for the Society of Lloyd’s, in 1990, before the other lines of insurance business. Lloyd’s calculates the credit equalisation reserve at Society level and allocates the result between itself and members on a fair and equitable basis.
The rules were revised for accounting periods ending on or after 23 December 1996. These are now given in INSPRU 1.4.38. The calculation of credit insurance equalisation reserves is as follows.
- Transfers in - 75% of the technical surplus for the financial year (see GIM7210) 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.
For example if 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.
Technical surplus and technical deficit are defined as
- for business accounted for on an accident year basis, the amount by which net premiums earned plus other technical income exceed, or fall short of, net claims incurred, claims management costs and technical charges
- for business accounted for on an underwriting year basis, the amount by which net premiums written plus other technical income exceed, or fall 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.