»Ê¹ÚÌåÓýapp

This example demonstrates how separate ‘shadowâ€� reserves operate. A reserve of £105m has been built up in years prior to the current year ended 31st December 2006. »Ê¹ÚÌåÓýapp example shows how the regulatory reserve for this year is calculated and how the shadow reserve is calculated for tax purposes.

Calculation of transfer in or out

• Underwriting income £100 million
• Underwriting expenditure £70 million
• Technical surplus £30 million

»Ê¹ÚÌåÓýappre is a potential transfer in of 75 per cent of technical surplus

75 per cent of the technical surplus of £30m = £22.5m

This is subject to a limit of 12 per cent of the written premiums for that financial year (see GIM7210):

»Ê¹ÚÌåÓýapp maximum transfer in is therefore £9m (12 per cent of £75m). Because the potential transfer in exceeds the limit, it must be capped. Transfers in are therefore limited to £9m.

At this point the equalisation reserve looks like this:

• Reserve b/f £105 million
• Transfers in £9 million
• Transfers out Nil
• Potential reserve c/f £114 million

Calculation of maximum reserve

»Ê¹ÚÌåÓýapp reserve carried forward may have to be capped if it exceeds the maximum reserve level. »Ê¹ÚÌåÓýapp reserve maximum will be 150 per cent of the highest annual amount of premiums written in any year out of the last 5 years. In this example the annual premium is assumed to have been constant at £75m for the past 5 years. »Ê¹ÚÌåÓýapp highest annual premium will therefore be £75m.

»Ê¹ÚÌåÓýapp maximum reserve is therefore:

• £75 million x 150 per cent £112.5 million

»Ê¹ÚÌåÓýapp maximum reserve limit of £112.5m would be exceeded by £1.5m so the amount of the reserve carried forward is limited to £112.5m giving an effective transfer in of £7.5m instead of £9m.

Calculation of shadow tax equalisation reserve

»Ê¹ÚÌåÓýapp shadow tax equalisation reserve will be calculated taking no account of the reserve of £105m brought forward from earlier years:

• Reserve b/f NIL
• Transfer in £9 million
• Transfer out NIL
• Potential reserve c/f £9 million

»Ê¹ÚÌåÓýapp maximum reserve limit of £112.5m would not be exceeded for tax purposes so the full transfer in of £9m may be made and tax relief will be given on this amount.