Insurance companies deal with large and complex claims made against policies that are sold by them. It may often take months, or even years, to settle some claims. To ensure the company reports and avoid unpleasant surprises, insurers assign a claim reserve to each incident that reflects their best estimate of the liability. The term ‘Reserve’ is defined by the amount of money earmarked for a specific purpose. Theoretically, the reserve is an amount simultaneously with interest to be earned and premiums to be paid that will exactly be equal to all of the company’s contractual commitments.
Insurance reserves: The money which is reserved by insurers for the purpose of ensuring future payments of the insured sums and insurance compensation depending on the types of insurance.
Claims Reserves
A claim reserve is an amount of money that is set aside by an insurance company or by an insurer to pay policyholders who have filed or expected to file legal claims on their policies. This reserve is also known as the ‘balance sheet reserve’. The reserve amount of money under the claim reserve is for both the type of claims i.e. for RBNS (reported but not settled) and IBNR (incurred but not reported) claims.
Voluntary reserve
Voluntary reserve refers to fiscal reserve or other liquid assets set aside by insurance companies. Voluntary reserves are surplus or additional liquid assets above the requirement that ensure the solvency (the ability of a company to meet its long-term debts and financial obligations) of the insurance agencies. The most common reason for establishing a voluntary reserve for a company is that it helps to make the company appear liquid and stable. Moreover, voluntary reserve acts as a contingency fund, that is, to meet unexpected obligations and pay future liabilities.
Loss reserve
Loss reserve is the estimation of liability of an insurance company from future claims. Typically, composed of liquid assets, loss reserve allows an insurer or insurance company to cover claims made against policies that it underwrites. These estimating liabilities may be a complicated undertaking. Insurers must take into account the span of the insurance contract, the type of insurance offered and the edges of a claim being resolved quickly. Insurers have to adjust their loss reserve calculations according to the circumstances.
When a new policy is underwritten by an insurer, it records a receivable premium and a claim obligation (which is a liability). The liability is a considered portion of the unpaid losses account, which depicts the loss reserve.
Unearned premium reserves
Unearned premium reserves (UPR) is something that appears in the liability portion of the balance sheet of an insurance company. It is a kind of technical reserve that reflects the measure of written premiums but not yet earned. The unearned premium reserve of a company may be considered as its deferred income. It is the premium corresponding to the time duration remaining of an insurance policy. This reserve is proportionate to the unexpired portion of the insurance.
Statutory Reserves
These reserves are state-mandated reserve constraints for insurance companies. By law, insurers must hold a part of their assets as either cash or temporary securities so that they will be able to make good on their claims in a timely manner. Statutory reserves for insurance corporations are measured in two different ways; a rule-based approach and a principle-based approach. The Rule-based approach basically tells insurers how much money must be kept on reserve based on standardized formulas and sets of assumptions. More recently, many states have been moving toward a principle-based approach, which gives insurers greater freedom in setting their reserves.