Voluntary Reserve

Voluntary Reserve

Overview

A voluntary reserve is cash or liquid assets an insurance company holds above the minimum reserves required by regulators. These additional reserves—also called additionally held liquid assets—are reported separately in financial statements and serve to strengthen an insurer’s ability to meet obligations beyond the regulatory baseline.

How it works

State regulators assess insurer solvency using tools such as the Insurance Regulatory Information System (IRIS), administered by the National Association of Insurance Commissioners (NAIC). IRIS analyzes filed financial data and liquidity ratios to flag insurers that may need closer examination. Companies whose ratios fall outside acceptable ranges can face regulatory scrutiny.

Determining the reserve amount

Insurers balance competing priorities when setting voluntary reserves:
* Stability and solvency: Larger reserves signal the ability to withstand catastrophes or unexpected claims.
* Opportunity cost: Cash held in reserve is not available for reinvestment, growth, or shareholder distributions.

There are generally few legal restrictions on how a company uses its voluntary reserve—it can fund unexpected expenses or pay dividends. However, tax rules and accounting practices (especially for property and casualty insurers) can discourage building excessive buffers.

Voluntary reserves are distinct from claim reserves, which are funds set aside for claims that have occurred but not yet been filed or settled.

Industry standards and evolving rules

Typical voluntary reserve levels in the industry range from about 8% to 12% of a company’s revenues, though requirements vary by the types of risks assumed.

Reserve-setting is an evolving regulatory area. A NAIC review found that traditional formulas could be excessive for some insurers and insufficient for others, particularly given the growing complexity of life insurance products. That led to recommendations for principle-based reserving (PBR), which sets requirements using a company-specific mix of factors such as client demographics, financial performance, and capital strength. Many states have moved to adopt PBR-style approaches.

Key takeaways

• Voluntary reserves are assets held above regulatory minimums to improve an insurer’s liquidity and solvency.
• Regulators use systems like IRIS to monitor insurer liquidity and prompt closer review when ratios are outlying.
• Companies weigh the safety of larger reserves against lost investment or shareholder-return opportunities.
• Industry practice typically targets reserves around 8–12% of revenue, but standards are shifting toward more principle-based, company-specific methods.