What level of reserve ratios is typical for an insurance company to protect against large losses?

In the United States and most developed nations, regulators impose required statutory capital reserve ratios on insurance companies to conduct business. There may be large differences in the nature and definition of acceptable reserves, which can make it tricky for companies, and their shareholders, that operate in multiple jurisdictions.

Most reserve requirements are established at the state level. Standard levels include 8% to 12% of the insurer's total revenue, but the actual amount needed varies depending on the types of risk a company currently assumes.

The Center for Insurance Policy and Research (CIPR) collects and examines different insurance rules across the globe. According to CIPR reports, the United States is somewhat unique because capital requirements are not seen as the primary means of risk analysis in the industry.

The CIPR identifies three stages in the U.S. regulatory system for insurance companies. The first stage involves restriction of activities or a requirement for prior approval for specific company action. The first stage is largely state-implemented and can vary across the country. The second stage involves public financial oversight, where state and federal regulators examine insurance statements for potential insolvency.

Only the last stage in the U.S. risk prevention process involves reserve ratios. These are described as backstops or risk-based capital (RBC) rules. An insurance company must always hold capital exceeding the minimum regulatory levels or it may be forced to cease business operations until in compliance.

Each state has its own regulatory body for insurance with commissioners who sometimes work in tandem to promote uniformity among the various national insurance companies. The National Association of Insurance Commissioners (NAIC) created its own RBC formula to establish a hypothetical minimum capital level.

The NAIC uses the RBC calculator to decide if and when to take specific actions against companies that have assumed too much risk. However, there are no hard-and-fast rules about what reserve ratios or reserve compositions constitute actionable thresholds.