Valuation Reserve

What Does Valuation Reserve Mean?

A valuation reserve is an amount of money that life insurance companies set aside as a safeguard against the possibility that their investments may decline in value. Required by law, these reserves supplement loss reserves and ensure that insurance companies can still settle claims in the event of a failed investment, using funds earned from premiums. Because policyholder premiums are what ultimately fund these reserves, reserve obligations are one of the factors that shape average life insurance costs across different insurers.

A valuation reserve is also referred to as a mandatory securities valuation reserve.

Insuranceopedia Explains Valuation Reserve

The reserve requirement exists because life insurance policies often span long periods, and inevitable fluctuations in the insurer’s investments could deplete a significant portion of the loss reserves. Originally, the National Association of Insurance Commissioners (NAIC) maintained a mandatory securities valuation reserve (MSVR); however, after 1992, this requirement was incorporated into the asset valuation reserves (ASV) of insurers. Reserve practices like these feed into the financial strength ratings that buyers usually check when comparing the best life insurance companies, since the same ratings reflect how well an insurer can pay claims decades from now.