what are statutory reserves 
statutory reserves are the funds that state insurance regulators require the insurance companies operating in their state to maintain at any given time the purpose of statutory reserves is to help ensure that insurance companies have adequate liquidity available to honor all of the legitimate claims made by their policyholders understanding statutory reservesthe mccarran ferguson act passed by congress in 1945 gave states the authority to regulate insurance companies to do business in a state each insurer must be licensed by the state s insurance department and abide by its rules among those rules is how much money an insurer must keep in reserve to make sure that it will be able to pay its future claims insurance companies collect insurance premiums from their customers and then invest those premiums in their general account to generate a return on investment roi in theory insurers might be tempted to invest a very large fraction of the premiums they collect in order to maximize their return however doing so could leave them with insufficient cash on hand to satisfy the claims made by their customers to prevent this from happening state insurance regulators enforce minimum levels of liquidity that insurance companies must maintain these statutory reserves can either be held in cash or in readily marketable securities that can be converted into cash reliably and on short notice statutory reserves apply to a range of insurance products including life insurance health insurance property and casualty insurance long term care insurance and annuity contracts the requirements can vary from one state to another and according to the type of insurance product statutory reserves methodsin setting the level of statutory reserves state insurance regulators use two basic approaches the first of these is a rules based approach in which insurers are told how much of their premiums they must keep in reserve based on standardized formulas and assumptions the second approach known as the principles based approach gives insurers greater leeway in setting their reserves specifically it allows them to set reserves based on their own experience such as the actuarial statistics and past claims behavior of their own customers provided that they are as large or larger than the reserves stipulated under the rules based approach 