how a voluntary reserve works
state regulators use tools provided by the insurance regulatory information system iris which is managed by the national association of insurance commissioners naic to determine the solvency of insurance companies in their jurisdictions and the appropriate amount of cash they should have in reserve iris mines financial information filed by each insurance company in order to determine which insurance companies may face solvency issues the regulatory body determines a range of liquidity ratio values that are considered acceptable for each company outlying values indicate that an insurer should be examined more closely by regulators insurance companies have competing considerations when deciding on the size of a voluntary reserve a large amount of cash on hand is a sign of the company s stability and its ability to meet the demands of any catastrophe but it also decreases the amount available to reinvest in the business or reward shareholders there are few restrictions on the use of a voluntary reserve however the company could choose to pay any unexpected expense from it or for that matter use it to fund a shareholder dividend various tax laws and accounting practices discourage property and casualty insurers in particular from setting aside excess money even for catastrophes an insurance company s voluntary reserve is separate from its claim reserve which is an amount of money budgeted for policyholder claims that have not yet been filed standard levels of reserves in the industry range from 8 to 12 of the company s total revenues the requirements vary depending on the type of risks a company assumes reserve requirements are a shifting field for regulators in 2016 an naic report concluded that the existing formulas for reserves were excessive in some cases and inadequate in others depending on the circumstances and clientele of the company the standards it found did not reflect the growing variety and complexity of financial products that are now sold by life insurance companies the report recommended principle based reserving for life insurance companies this departure from past practice bases reserve requirements on a highly individualized mix of factors that include the demographics of the company s clients the company s financial performance and its financial strength as a result at least 46 states have moved to change their formulas determining reserve requirements 