Definition - What does Statutory Reserve mean?
A statutory reserve is an amount of money set aside by a financial institution, such as a bank or insurance firm, in order to meet unmatured obligations. It is a component of the balance sheet for an insurance firm and can be in the form of anything easily convertible to cash, such as marketable securities.
Insuranceopedia explains Statutory Reserve
An insurance company accepts premiums from customers in exchange for coverage. The client pays premiums in good faith and therefore expects the insurer to keep their word in case the insured peril occurs. The government does not take chances on this issue and sets various standards through regulating bodies for this sector, and one requirement is the maintenance of a statutory reserve. The term reserve means kept or retained for future use. Therefore, this money is used to meet the obligations of the insurer and remain solvent.
The essence of maintaining a statutory reserve is to ensure that, even in cases where an insurance firm operates under a loss, it can still fulfill any necessary claim payouts. Additionally, in case a calamity occurs and many people file claims, the insurance firm can dip into these reserves wholly or partially to fully pay every necessary claim. Usually, a statutory reserve reduces profitability, but it is a good indicator for investors. This is perhaps the reason some insurance firms maintain another reserve known as a voluntary reserve.