WHAT IS 'Valuation Reserve'

Valuation reserves are assets that insurance companies set aside per state law to mitigate the risk of declines in the value of investments they hold.

Because policies such as life insurance, health insurance and various annuities may be in effect for extended periods of time, these reserves protect the insurance company from losses from investments that may not perform as expected. This helps assure that policy holders are paid for claims and that annuity holders receive income even if an insurance company’s assets lose value.

BREAKING DOWN 'Valuation Reserve'

Valuation reserve requirements have changed over the years. Before 1992, a mandatory securities valuation reserve was required by the National Association of Insurance Commissioners to protect against a decline in value in the securities an insurance company held as an investment.

After 1992, however, the mandatory securities valuation reserve requirements were changed to include an asset valuation reserve and an interest maintenance reserve. This reflected the nature of the insurance business with companies holding different categories of assets and customers purchasing more annuity-related products.

Changing Valuation Reserve Requirements in a Shifting Market

Life insurance companies have the obligation to pay beneficiaries named by policyholders who purchase insurance and annuities. These companies need to hold an appropriate level of assets in reserve to make sure they can meet these obligations over many years that policies may be in effect.

Various state laws and standards require that this level be calculated on an actuarial basis. This approach accounts for expected claims among policyholders, plus forecasts on future premiums the company will receive and how much interest a company can expect to earn.

Yet the market for insurance and annuity products had been shifting in the 1980s. The American Council of Life Insurers reported that in 1980, life insurance represented 51 percent of reserves held by companies while reserves held for individual annuities accounted for only 8 percent.

But by 1990 reserves for life insurance fell to 29 percent of all reserves while the percentage held for individual annuities climbed to 23 percent. This reflects growth in the popularity of retirement plans that are administered by insurance companies.

A changing interest rate climate can create risk that impacts reserves needed for ongoing annuity payments more than for life insurance benefits that are paid in one lump sum.

By recommending changing regulations to separate asset valuation reserves from interest maintenance reserves, the National Association of Insurance Commissioners recognized the need to protect against the fluctuations in the values of equity and credit-related capital gains and losses differently than interest-related gains and losses.

  1. Valuation Premium

    A valuation premium is rate set by a life insurance company ...
  2. Loss Reserve

    Loss reserve is an estimate of an insurer’s liability from future ...
  3. Conditional Reserves

    Surplus reserves held by insurance companies that are treated ...
  4. Personal Lines Insurance

    Personal lines insurance includes property and casualty insurance ...
  5. Insurance Industry ETF

    A sector-following fund that invests primarily in insurance companies, ...
  6. Reserves To Policyholders' Surplus ...

    Reserves To Policyholders' Surplus Ratio is the ratio of an insurer’s ...
Related Articles
  1. Insurance

    Are You Protected If Your Insurance Company Goes Belly-Up?

    Consumer protection against insurance company failures actually falls into the hands of state governments. How much protection do you have?
  2. Insurance

    For Life Insurers, Making Money Is A Numbers Game

    Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
  3. Retirement

    Annuities: The Last Of The Safe Investments?

    Fixed annuities are a safe bet for any investor - even in today's volatile market.
  4. Insurance

    Understanding your insurance contract

    Learn how to read one of the most important documents you own: your insurance contract.
  5. Investing

    Exchange Annuities or Insurance for Long-Term Care

    Annuities and life insurance that are no longer needed can be exchanged for long-term care coverage.
  6. Retirement

    Life insurance versus annuity

    Are you thinking of buying insurance? There are certain scenarios in which investing in insurance is a savvy move. But expect a big chunk of your money to go toward fees.
  7. Insurance

    Bundle Your Insurance for Big Savings

    Bundling your insurance can save you money and time. Read on to see how to get the most out of multi-line insurance discounts.
  8. Insurance

    The History of Insurance in America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  9. Insurance

    How to Pick the Right Life Insurance Plan

    Finding the right life insurance policy - if you need one at all - can be more challenging than it seems. Use this guide to find the right one for you.
  10. Insurance

    Why Insurance Is Not An Investment

    Insurance protects you financially from risk but should not be considered an investment.
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center