Policy Reserve

What Does Policy Reserve Mean?

A policy reserve is the amount of money an insurer is required to keep readily available to pay claims. Since it is inevitable that claims will be made on a certain percentage of the insurance policies issued, insurers must maintain policy reserves. These reserves are designated for events that have not yet occurred but may happen during the remaining term of the policy. Actuaries use complex formulas, based on statistical analysis, to calculate the required reserve amount.

Insuranceopedia Explains Policy Reserve

Policy reserves are distinct from claims reserves, also referred to as loss reserves. For example, if someone hits a tree with their car and reports the collision to their insurer, the insurer is required to set aside funds in anticipation of paying out to settle the claim. Therefore, claims reserves are established only after a claim is made. In contrast, policy reserves must be maintained at all times while a policy is in force, in anticipation of potential future claims.