This example demonstrates how separate ‘shadow’ reserves operate. A reserve of £105m has been built up in years prior to the current year ended 31st December 2006. The 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 £100m
Underwriting expenditure £70m
Technical surplus £30m

There is a potential transfer in of 75 per cent of technical surplus

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

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