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. Clients who pay premiums in good faith expect 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 maintaining a statutory reserve to ensure the insurer remains solvent.
By maintaining a statutory reserve, an insurance firm can still fulfill its claim payouts even if it operates under a loss. Additionally, in the event of a calamity that results in an unusually high volume of claims, the insurance firm can dip into these reserves to pay these claims in full.
While maintaining a statutory reserve usually reduces profitability, it acts a good indicator for investors. This is one reason some insurance firms maintain another reserve known as a voluntary reserve.