PRU 7.5 Equalisation provisions

PRU 7.5 applies to an insurer carrying on general insurance business unless it is:

1. (1)

   a non-directive friendly society; or

2. (2)

   an incoming EEA firm; or

3. (3)

   an incoming Treaty firm.

1. (1)

   PRU 7.5.11 R to PRU 7.5.37 G apply to any firm, other than an assessable mutual, which carries on the business of effecting or carrying out general insurance contracts falling within any description in column 2 in Table PRU 7.5.12 R ("non-credit insurance business").

2. (2)

   A firm falling within (1) must classify all of its non-credit insurance business into separate insurance business groupings, as specified in Table PRU 7.5.12 R.

For the purposes of PRU 7.5.11 R to PRU 7.5.37 G, a firm with its head office in the United Kingdom must take account of non-credit insurance business carried on by it world-wide.

For the purposes of PRU 7.5.11 R to PRU 7.5.37 G, a firm with its head office outside the United Kingdom need only take account of non-credit insurance business carried on by it from a branch in the United Kingdom.

In respect of each financial year, a firm must, unless PRU 7.5.18 R applies:

1. (1)

   calculate the amount of its non-credit equalisation provision as at the end of that year in accordance with PRU 7.5.20 R; and

2. (2)

   maintain a non-credit equalisation provision calculated in accordance with PRU 7.5.20 R for the following financial year.

1. (1)

   PRU 7.5.17 R does not apply to any firm in respect of any financial year if, as at the end of that year:

   1. (a)

      no non-credit equalisation provision has been brought forward from the preceding financial year; and

   2. (b)

      the amount of the annualised net written premiums for all the non-credit insurance business carried on by it in the financial year is less than the threshold amount.

2. (2)

   The threshold amount in respect of any financial year is the higher of:

   1. (a)

      1,500,000 Euro; and

   2. (b)

      4% of net written premiums in that financial year in respect of all its general insurance business, if this amount is less than 2,500,000 Euro.

1. (1)

   Unless PRU 7.5.22 R applies, the amount of a firm's non-credit equalisation provision as at the end of a financial year is the higher of:

   1. (a)

      zero; and

   2. (b)

      whichever is the lower of:

      1. (i)

         the aggregate of the amounts of the maximum provision for each insurance business grouping as at the end of that financial year; and

      2. (ii)

         the sum of A and B.

2. (2)

   For the purposes of (1)(b)(ii):

   1. (a)

      A is the amount of the non-credit equalisation provision, if any, brought forward from the financial year immediately preceding that in respect of which the calculation is being performed; and

   2. (b)

      B is:

      1. (i)

         the aggregate of the amounts of the provisional transfers-in for each insurance business grouping; minus

      2. (ii)

         the aggregate of the amounts of the provisional transfers-out for each insurance business grouping.

3. (3)

   For any insurance business grouping:

   1. (a)

      the amount of the maximum provision in (1)(b)(i) is to be determined in accordance with PRU 7.5.24 R;

   2. (b)

      the amount of the provisional transfers-in in (2)(b)(i) is to be determined in accordance with PRU 7.5.26 R; and

   3. (c)

      the amount of the provisional transfers-out in (2)(b)(ii) is to be determined in accordance with PRU 7.5.29 R.

1. (1)

   The amount of a firm's non-credit equalisation provision as at the end of a financial year is zero if:

   1. (a)

      as at the end of that year, the firm meets either of the conditions specified in (2) and (3); and

   2. (b)

      the annualised net written premiums for all the non-credit insurance business carried on by the firm in that year are less than the threshold amount.

2. (2)

   The first condition is that the firm carried on non-credit insurance business in the first financial year of the relevant period and, for each of any two or more financial years of that period, the annualised net written premiums for business of that description were less than the threshold amount.

3. (3)

   The second condition is that the firm did not carry on non-credit insurance business in the first financial year of the relevant period and the average of the annualised net written premiums for business of that description carried on by the firm in each financial year of the relevant period was less than the threshold amount.

4. (4)

   For the purposes of this rule:

   1. (a)

      the threshold amount is the amount determined in accordance with PRU 7.5.18 R (2): and

   2. (b)

      the relevant period is the period of four financial years ending immediately before the beginning of the financial year in (1).

1. (1)

   For the purposes of the calculation required by PRU 7.5.20 R, the amount of the maximum provision for any insurance business grouping is to be determined in accordance with (2) to (5).

2. (2)

   Unless (4) applies, the amount of the maximum provision for the grouping, as at the end of a financial year, is the amount determined by multiplying X and Y.

3. (3)

   For the purposes of (2):

   1. (a)

      X is the percentage specified in Table PRU 7.5.25 R in relation to the grouping; and

   2. (b)

      Y is the average of the amount of the annualised net written premiums for non-credit insurance business in the grouping carried on by the firm in each financial year of the relevant period.

4. (4)

   Where Y is a negative amount, the maximum provision for that insurance business grouping is zero.

5. (5)

   For the purposes of (3)(b), the relevant period is the five-year period comprising:

   1. (a)

      the financial year in (2); and

   2. (b)

      the previous four financial years.

1. (1)

   For the purposes of the calculation required by PRU 7.5.20 R, the amount of the provisional transfers-in for any insurance business grouping is to be determined in accordance with (2).

2. (2)

   The amount of the provisional transfers-in for the grouping, as at the end of a financial year, is the amount determined by multiplying X and Y.

3. (3)

   For the purposes of (2):

   1. (a)

      X is the percentage specified in Table PRU 7.5.27 R in relation to the grouping; and

   2. (b)

      Y is the amount of the net written premiums for non-credit insurance business in the grouping that was carried on by the firm in the financial year in (2), including adjustments in respect of previous financial years.

1. (1)

   For the purposes of the calculation required by PRU 7.5.20 R, the amount of the provisional transfers-out for any insurance business grouping is to be determined in accordance with (2).

2. (2)

   The amount of the provisional transfers-out for the grouping, as at the end of a financial year, is the lower of:

   1. (a)

      the amount of the maximum provision for the grouping under PRU 7.5.24 R for that financial year; and

   2. (b)

      the abnormal loss for the grouping under PRU 7.5.30 R for that financial year.

For each insurance business grouping, the abnormal loss as at the end of a financial year in relation to which an equalisation provision is calculated is:

1. (1)

   (for business within the insurance business grouping accounted for on an accident year basis) the amount, if any, by which the amount of net claims incurred exceeds the greater of:

   1. (a)

      zero; and

   2. (b)

      the percentage of net earned premiums in that financial year specified in the Table in PRU 7.5.31 R; or

2. (2)

   (for business within the insurance business grouping accounted for on an underwriting year basis) the amount, if any, by which the amount of net claims paid (plus adjustment for change in net technical provisions, other than any change in provisions for claims handling expenses or equalisation) exceeds the greater of:

   1. (a)

      zero; and

   2. (b)

      the percentage of net written premiums in that financial year specified in the Table in PRU 7.5.31 R.

1. (1)

   This rule applies to modify the application of PRU 7.5.24 R and PRU 7.5.26 R in any case where a firm has transferred to another undertaking any rights and obligations under general insurance contracts falling within any insurance business grouping.

2. (2)

   As at the end of the financial year in which the transfer takes place, net written premiums in respect of the transferred contracts in any grouping must be deducted from total net written premiums for that grouping before calculating the maximum provision under PRU 7.5.24 R or provisional transfers-in under PRU 7.5.26 R.

If all the rights and obligations of a firm in relation to non-credit insurance business in any insurance business grouping have been transferred, the maximum provision for the grouping under PRU 7.5.24 R is zero.

1. (1)

   This rule applies to modify the application of PRU 7.5.24 R, PRU 7.5.26 R and PRU 7.5.29 R in any case where another undertaking has transferred to a firm any rights and obligations under general insurance contracts falling within any insurance business grouping.

2. (2)

   As at the end of the financial year in which the transfer takes place a sum equal to that part of the consideration for the transfer that relates to business in an insurance business grouping must be:

   1. (a)

      excluded from net premiums (written or earned) before performing the calculations required by PRU 7.5.24 R (maximum provision) and PRU 7.5.26 R (provisional transfers in);

   2. (b)

      included in net premiums (written or earned) before performing the calculation required by PRU 7.5.30 R (abnormal loss); and

   3. (c)

      excluded from net claims (paid or incurred) before performing the calculation required by PRU 7.5.30 R (abnormal loss).

PRU 7.5.39 R to PRU 7.5.47 G apply to:

1. (1)

   any UK insurer; and

2. (2)

   any non-EEA direct insurer;

which carries on the business of effecting or carrying out general insurance contracts falling within general insurance business class 14 (which business, excluding contracts of reinsurance, is referred to in PRU 7.5 as "credit insurance business").

For the purposes of PRU 7.5.43 R, a UK insurer must take account of the credit insurance business carried on by it world-wide.

1. (1)

   For the purposes of PRU 7.5.43 R:

   1. (a)

      a Swiss general insurer or an EEA-deposit insurer must take account of the credit insurance business carried on by it in the United Kingdom; and

   2. (b)

      a UK-deposit insurer must take account of the credit insurance business carried on by it world-wide.

2. (2)

   For the purposes of PRU 7.5.44 R:

   1. (a)

      a UK-deposit insurer need only take account of the credit insurance business carried on by it in all EEA States, taken together; and

   2. (b)

      any other description of non-EEA direct insurer (including an EEA-deposit insurer and a Swiss general insurer) need only take account of the credit insurance business carried on by it in the United Kingdom.

In respect of each financial year, a UK insurer or a non-EEA direct insurer must, unless PRU 7.5.44 R applies:

1. (1)

   calculate the amount of its credit equalisation provision as at the end of that year in accordance with PRU 7.5.45 R; and

2. (2)

   maintain a credit equalisation provision calculated in accordance with PRU 7.5.45 R for the following financial year.

PRU 7.5.43 R does not apply to any UK insurer or a non-EEA direct insurer in respect of any financial year if, as at the end of that year, the annualised net written premiums for its credit insurance business are less than 4% of annualised net written premiums in that financial year in respect of all its general insurance business, if this amount is less than 2,500,000 Euro.

1. (1)

   The amount of a UK insurer's, or a non-EEA direct insurer's, credit equalisation provision as at the end of a financial year ("financial year A") is the higher of:

   1. (a)

      zero; and

   2. (b)

      whichever is the lower of:

      1. (i)

         150% of the highest amount of net written premiums for credit insurance business carried on by the firm in financial year A or in any of the previous four financial years; and

      2. (ii)

         the amount of the credit equalisation provision brought forward from the preceding financial year, after making either of the adjustments in (2).

2. (2)

   The adjustments are:

   1. (a)

      the deduction of the amount of any technical deficit arising in financial year A; or

   2. (b)

      the addition of the lower of:

      1. (i)

         75% of the amount of any technical surplus arising in financial year A; and

      2. (ii)

         12% of the amount of the net written premiums for credit insurance business carried on by the firm in financial year A.

3. (3)

   For the purposes of (2) the amount of technical deficit or technical surplus is to be determined in accordance with PRU 7.5.46 R.

For the purposes of the adjustments in PRU 7.5.45 R (2), technical surplus (or technical deficit) in respect of credit insurance business is the amount by which the aggregate of net earned premiums and other technical income exceeds (or falls short of) the sum of net claims incurred, claims management costs and any technical charges.

For the purposes of PRU 7.5, the exchange rate from the Euro to the pound sterling for each year beginning on 31 December is the rate applicable on the last day of the preceding October for which the exchange rates for the currencies of all the European Union member states were published in the Official Journal of the European Union.