DEFINITION of 'Voluntary Reserve'

Voluntary reserve is a monetary reserves held by insurance companies. Government agencies often regulate the reserve requirements of financial institutions and insurance companies to ensure their solvency. Voluntary reserves are known as additionally held liquid assets.

BREAKING DOWN 'Voluntary Reserve'

Insurance companies hold voluntary reserves to appear to be more financially stable and improve their liquidity ratios. Such requirements are often internally agreed upon by the insurer and not decided by law. State regulators use tools from the Insurance Regulatory Information System, or IRIS, managed by the National Association of Insurance Commissioners (NAIC) to determine the solvency of insurance companies.

The Insurance Regulatory Information System mines the financial information filed by insurance companies in order to calculate ratios that can be used to determine which insurance companies face solvency issues. IRIS determines a range of ratio values that are considered acceptable, with outlying values indicating that an insurer should be examined more closely.

The IRIS system automatically generates financial ratios based upon the financial statements that insurance companies are required to submit to insurance regulators. Reports generated from these ratios list each reviewed insurance company, the financial ratios derived for each company, and the ranges that each financial ratio should fall within. Companies that fall outside of the usual range are brought to the attention of regulators.

Reserves Balancing Act

For insurers, reserves are a balancing act. They'll seek to keep the minimums required by state regulators, but increasing reserves beyond that siphons away capital that could be used to create more value for stakeholders. For property and casualty insurers, various tax laws and accounting practices discourage them from setting aside excess money for contingencies such as catastrophes.

Standard levels of reserves include 8 to 12% of the insurers' total revenues. These requirements are never really fixed since they depend on the type of risks a company has presently assumed.

Reserve requirements are a shifting field for regulators. In 2016, after an NAIC report that recommended something called “principle-based reserving” for life insurance companies, some 46 states moved to change the old formulas to reflect a newer more complicated reality for the growing variety of products that life insurance companies sell. The new formulas aim to adjust for economic conditions or an insurer’s experience in the industry, rather than apply one-size fits all calculations for an insurer’s cash, known as reserves. NAIC had found that the old formulas had led to reserves that were sometimes excessive and sometimes inadequate. 

  1. Net Liabilities To Policyholders' ...

    Net Liabilities To Policyholders' Surplus is the ratio of an ...
  2. Current Liquidity

    Current Liquidity is the total amount of cash and unaffiliated ...
  3. Valuation Reserve

    A valuation reserve is a fund set aside by an insurance company ...
  4. Developed To Net Premiums Earned

    Developed To Net Premiums Earned is the ratio of developed premiums ...
  5. Insurance Industry ETF

    An insurance industry ETF invests primarily in insurance companies ...
  6. National Association of Insurance ...

    National Association of Insurance Commissioners (NAIC) is a national ...
Related Articles
  1. Insurance

    How To Easily Understand Your Insurance Contract

    Understanding your insurance contracts can go a long way in making sure that your advisor's recommendations are on track. Learn how to read yours today.
  2. 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.
  3. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  4. Insurance

    4 Things That Keep You From Getting Life Insurance

    We look at four common reasons people give for not applying for life insurance, and see if they're legitimate.
  5. Insurance

    Choosing Between Whole and Term Life Insurance

    For most people, term life insurance is more suitable than whole life insurance. Here's why.
  6. Insurance

    What To Do When Your Insurance Company Won't Pay

    Struggling to get a claim honoured? Find out what you can do.
  7. 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.
  8. Insurance

    World's Top 10 Insurance Companies

    These are the 10 largest insurance companies in the world.
  9. Insurance

    The 5 Biggest Canadian Insurance Companies

    Learn more about the insurance industry as a whole, how it functions in Canada, and the five largest Canada-based insurance companies.
  1. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
Trading Center