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HMRC internal manual

General Insurance Manual

Equalisation reserves: cessations and transfers of business: transfers of a block or all of the business

Where blocks of business are transferred between insurance companies INSPRU 1.4.32 onwards specifies which premiums and claims are taken into account in calculating the equalisation reserve of the transferor, and which are taken account into account by the transferee. These rules apply only to transfers under Part 7 FSMA 2000, or to transfers that take place by novation with the agreement of the policy holders. They do not apply to portfolio reinsurance arrangements. Equalisation reserve calculations will follow whatever effect the portfolio reinsurance arrangements have on the figures for premiums and claims for the companies concerned.

The transferor should not include any of the premiums relating to the transferred business in the calculations either of the transfer into the reserve or of its maximum equalisation reserve for the year in which the transfer takes place and subsequent years. The values taken for net written premiums and net earned premiums for the current year should exclude the business transferred, and if the transferred business includes any written in an earlier year the written premiums for that year will be reduced for the purposes of the maximum reserve calculation. Moreover, if all of the business falling within a business group is transferred, the group maximum for that line of business at the year end is reduced to nil, even if the five year average of written premiums is still positive after taking account of the transfer.

A company receiving business (the transferee) is required to set up or amend its existing equalisation reserve by including a figure for net written and earned premiums relating to the transferred business. Where the company has actually accounted for the consideration passing on the transfer by means of an adjustment to premiums in its regulatory return the adjustment to the reserve calculations will follow the return. But where the company has accounted for the consideration by adjusting the claims figures in its return that adjustment is to be ignored and the equalisation reserve calculated by reference to the calculation that would have been made had the consideration been accounted for as an adjustment to premiums. Any necessary apportionment of the consideration is made between business groupings, and as consideration can pass either way on a transfer the regulations specifically provide that the adjustments to the premium figures may be positive or negative.

The tax treatment of equalisation reserves where there has been a transfer of business follows the rules laid down in the equalisation reserves regulatory rules even if the transfer is between connected persons and results in other tax computation adjustments. The exception to this is where a tax avoidance scheme is involved (see GIM7340).