Equalization reserve

Catastrophe risks, windstorm, hail, natural catastrophes, nuclear risks, terrorism, pollution, credit, are marked by quiet years followed by years of extreme losses. If the insurer books all the profit of quiet years each year, it distributes it or pays it in tax, and no longer has it when the catastrophe strikes. The equalization reserve corrects this mismatch. In France, the Insurance Code and article 39 quinquies G of the General Tax Code allow a fraction of the technical profit of these lines to be set aside each year, within a limit set as a proportion of premiums, and drawn down when losses exceed the norm. Allocations are tax-deductible, and amounts unused after a long period must be written back. The mechanism smooths results and strengthens the capacity to absorb a shock. It is not recognized everywhere, however. International accounting standards treat it as equity rather than a liability, since it corresponds to no incurred loss, and Solvency II does not include it in technical provisions, where it reappears among own funds. It remains a national tax and accounting tool that catastrophe insurers use to keep their capital from one year to the next.