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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Repeal of equalisation reserves tax legislation for accounting periods ending on or after 1 January 2016

Solvency II Directive (2009/138/EC)

Solvency II is a European Union Directive aimed at protecting policyholders’ interests more effectively by making an insurer’s failure less likely and reducing the probability of consumer loss or market disruption. It also assists firms conducting business throughout the EU by implementing consistent standards. Where the Solvency I Directive (2002/13/EC) focussed specifically on capital adequacy, Solvency II is wider and includes requirements on risk management and governance within firms.

Solvency II applies to all insurance firms with annual gross premium income exceeding €5m or gross technical provisions in excess of €25m. Further detail may be found on the PRA website.

The capital requirements under Solvency II are deemed by the PRA to be sufficient for the purposes of capital adequacy and risk management for insurers, so equalisation reserves were no longer required following introduction of the Directive.

Consequently, the related tax rules no longer had any function and were repealed by FA12/S26(1) in relation to accounting periods ending on or after 1 January 2016 when Solvency II was implemented.