Reserve fund

The reserve fund is another of the terms of the Sure. It's worth meeting. It is a amount of money that insurers must maintain as provision and guarantee that they will fulfil all the commitments arising from their policies. In this article we will explain it in detail.

Reserve fund

The reserve fund is a amount of money that the insurance must have depositedI mean, he can't touch it. This fund acts as a financial mattress that ensures that the insurer can deal with claims which arise from the claims covered by the policies, even in adverse or unforeseen situations (if it has more claims than expected or higher).

The establishment of a reserve fund is regulated by laws and regulations that seek to ensure that insurers have sufficient resources to fulfil their responsibilities. It is a mechanism designed to protect both customers and the insurer from financial risks, ensuring the stability of the insurance market in general.

The reserve fund is leaving accumulating as the insurer receives premiums from its customers.

Importance of the reserve fund

The reserve fund plays an essential role in ensuring the financial stability of the insurer and the confidence of customers in the insurance system.

1. Protection for insured persons

The reserve fund is a guarantee that the insurer will be able to pay the claims in case of No.. It is a mechanism that provides tranquility, as it ensures that the company is financially prepared to meet its commitments, even in unforeseen situations.

2. Financial stability of the insurer

Insurers need to maintain sound financial health in order to be able to operate effectively in the long term. The reserve fund acts as a buffer that protects the company from insolvent caused by unforeseen losses or economic crises. Maintaining this fund is one way to prevent the company from using loans or emergency measures in the event of a large number of simultaneous claims.

3. Policy compliance

Laws and regulations in most countries require insurers to maintain an adequate reserve fund. These rules are applied to protect consumers and ensure transparency and solvency in the insurance sector. Insurers who do not meet these requirements may face regulatory sanctions, including fines or the withdrawal of licences.

4. Preparation for exceptional crises or events

In crisis situations, such as natural disasters, pandemics or large-scale accidents, claims may increase exponentially in a short period of time. The reserve fund helps insurers to be prepared for such events, ensuring that they can cover the claims without compromising their financial stability.

In Spain, insurers are subject to strict regulations governing the maintenance of reserve funds. These rules are based on European guidelines under the Solvency IIa regulatory framework which applies to the whole of the European Union and which aims to ensure that insurers have sufficient capital to meet their obligations, including in the context of risk extreme.

The Solvency II requires insurers to maintain a solvency margin or reserve fund to enable them to deal with claims and claims, ensuring their long-term financial stability. This fund is not a fixed amount, but is based on the risk profile of each insurer. This means that the amount of the reserve fund varies according to several factors, such as:

1. The size of the insurer.
2. The type of risk it covers (life, not life, health, etc.).
3. The amount of premiums issued.
4. Exposure to the risk of catastrophic events.
5. The investment and other financial risks taken by the insurer.

Requirements

1. SCR

This is the minimum capital that insurers must maintain to ensure that they can meet their obligations over a year under adverse conditions. This level of solvency is calculated using complex models that consider market, subscription, operational, credit risks, among others. The European Commission sets out the formulas and methods for calculating this requirement.

2. Minimum capital required (RCM)

In addition to the SCR, Solvency II establishes a minimum capital below which it cannot be operated. If an insurer falls below this level, a more severe monitoring process is activated. The RCM is a proportion of the RCS and is designed to ensure that insurers maintain an adequate financial mattress at all times.

In Spain, Directorate-General for Insurance and Pension Funds (DGSFP) is the body that monitors compliance with Solvency II regulations. In addition to European requirements, the DGSFP may impose additional rules on technical reserves, depending on the type of insurance activity and the risk taken.

There is no general fixed amount as it is directly linked to the risk profile of each company. As a general orientation, the SCR for a typical life or non-life insurer may vary between 20% and 40% of their premium income. This means that if an insurance company collects EUR 100 million in annual premiums, its RCS could be between EUR 20 and 40 million, depending on the risk to which it is exposed.