Rule 330 — Limits of reserve for unexpired risks.
Sub-rule (1) caps the reserve for unexpired risks. In computing profits and gains for any insurance business other than life insurance, the amount carried over to a reserve for unexpired risks, including any amount carried over to an additional reserve eligible for deduction under paragraph 4(1)(d) of Schedule XIV to the Act, shall not exceed — for fire insurance or engineering insurance that covers terrorism risks, 100% of the net premium income of such business of the tax year; for fire insurance or miscellaneous insurance other than that just mentioned, 50% of the net premium income of such business of the tax year; and for marine insurance, 100% of the net premium income of such business of the tax year.
Sub-rule (2) deals with the excess. Any amount carried over to the reserve or additional reserve which is not allowed as a deduction under this rule in respect of a tax year shall not be included in the total income for the immediately succeeding tax year in the revenue account relating to which the amount is credited.
Sub-rule (3) defines two terms: "marine insurance" includes the Export Credit Insurance, and "net premium income" refers to the premium amount received as reduced by the reinsurance premium paid during the relevant tax year.
An insurer other than a life insurer must set aside a reserve for risks that have not yet run off at the year end, and the size of that reserve is a matter of judgment that directly reduces taxable profit. Paragraph 4(1)(d) of Schedule XIV allows the deduction and leaves the limits to be prescribed. The rule fixes them by class of business, allowing the whole of net premium income for marine and for fire or engineering business covering terrorism risks, where the exposure is long or catastrophic, and half of it for ordinary fire and miscellaneous business. Sub-rule (2) then stops the disallowed excess being taxed a second time when it comes back through the revenue account.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Limit on the reserve for fire insurance or engineering insurance that covers terrorism risks | 100% of the net premium income of such business of the tax year | Net premium income being the premium received as reduced by the reinsurance premium paid during the relevant tax year | Sub-rule (1)(a) |
| Limit on the reserve for fire insurance or miscellaneous insurance other than that in clause (a) | 50% of the net premium income of such business of the tax year | Net premium income being the premium received as reduced by the reinsurance premium paid during the relevant tax year | Sub-rule (1)(b) |
| Limit on the reserve for marine insurance | 100% of the net premium income of such business of the tax year | Marine insurance includes the Export Credit Insurance | Sub-rule (1)(c) |
The limits are ceilings on what may be carried over and allowed, not the amounts to be provided, and they are applied class by class rather than to the insurer as a whole: fire business that covers terrorism risks sits in clause (a) at 100%, while the insurer's other fire and miscellaneous business sits in clause (b) at 50%, so the two have to be computed separately. The base is net premium income as defined — premium received reduced by reinsurance premium paid during the relevant tax year — so an insurer that reinsures heavily has a smaller ceiling. Additional reserves are inside the cap: the amount carried over to any additional reserve eligible for deduction under paragraph 4(1)(d) of Schedule XIV counts towards the same limits. Sub-rule (2) is the relieving provision, and it is easy to miss — an amount disallowed in one year is not brought into total income in the immediately succeeding year in the revenue account relating to which it is credited, so the disallowance is not converted into income later. The rule applies only to insurance business other than life insurance.
An insurer's fire business covering terrorism risks has premium received of Rs 100 crore and reinsurance premium paid of Rs 20 crore, so net premium income is Rs 80 crore and clause (a) allows a reserve of up to Rs 80 crore. Its miscellaneous business has net premium income of Rs 60 crore, so clause (b) caps that reserve at Rs 30 crore; a carry-over of Rs 40 crore is disallowed to the extent of Rs 10 crore. Under sub-rule (2) that Rs 10 crore is not included in total income for the immediately succeeding tax year in the revenue account to which it is credited.
An insurer meets it in the computation of profits and gains of its non-life business under Schedule XIV, where the reserve for unexpired risks carried over in the revenue account is tested against these limits.
where the insurance business relates to fire insurance or engineering insurance that covers terrorism risks, 100% of the net premium income of such business of the tax year
"net premium income" refers to the premium amount received as reduced by the reinsurance premium paid during the relevant tax year
