What Does Policy Reserve Mean?
A policy reserve is the amount of money an insurer is required to maintain that is readily available to pay claims. As it is inevitable that claims will be made against some percentage of insurance policies written, insurers are required to maintain policy reserves. These reserves are specifically for events that have not yet happened but that could happen in the remainder of the life of the policy. Complex formulas devised by actuaries who analyze statistics are used to calculate the amount of reserve required.
Insuranceopedia Explains Policy Reserve
Policy reserves are separate from claims reserves, also known as loss reserves. As an example, suppose someone hits a tree with their car and they call their insurer to report the collision. The insurer is required to set aside funds in anticipation of having to pay out money to settle the claim. Thus, claims reserves need only be established after a claim is made. However, policy reserves must be on hand at all times a policy is in force in anticipation of possible future claims.