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.

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.

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.