Conditional reserves are surplus amounts an insurance company sets aside specifically to answer future claims. Since insurance companies are in the business of risks, and conditional reserves, which are funds taken from the asset lists but treated as liabilities to preclude their utilization for operation or for investment, provide a mechanism for cash readiness.
At any given time, insurers must have preparations in place to meet their obligations. Therefore, conditional reserves help make sure that insurance companies do not become insolvent. To mitigate the latter risk, state insurance commissioners and guarantee associations may mandate a certain amount to be set aside as reserves and not used as an asset. These funds are not linked to any long-term or high risk investments so they remain liquid in case a need arises.
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