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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Equalisation reserves: annual accounting on an underwriting year basis

The accounts and statements rules in IPRU(INS) allow insurance companies to use the underwriting year forms in the regulatory return (and in particular form 24) even though they are accounting on an annual basis (GIM3160).

The equalisation reserves rules, and the forms in the return that are based on them, link the method of calculating the ‘abnormal losses’ that govern transfers out of the reserve to the use of the accident or underwriting year forms.

It follows that a company that prepares its accounts on annual basis, but analyses premiums and claims on form 24, must calculate the loss ratio by reference to written premiums and paid claims rather than make the comparison between earned premiums and incurred claims that would be consistent with its shareholder accounts.

This follows from the way in which the original Regulations were drafted. Tax deductions and additions will be based on the transfers into, and out of, the regulatory reserve calculated according to the underwriting accounting rules.