In the United States, and most developed nations, regulators impose required statutory capital reserve ratios on insurance companies to conduct business. There may be large differences in the nature and definition of acceptable reserves; however, this can make it tricky for companies, and their shareholders, that operate in multiple jurisdictions.
Most reserve requirements are established at the state level. Standard levels include 8 to 12% of the insurers’ total revenues. These requirements are never really fixed since they depend on the type of risks a company has presently assumed.
Reserve Ratios from U.S. Insurance Regulator Regimes
The Center for Insurance Policy and Research, or CIPR, collects and examines different insurance rules across the globe. According to CIPR reports, the United States is somewhat unique because capital requirements are not seen as the primary means of risk analysis in the industry.
The CIPR identifies three stages in the U.S. regulatory system for insurance companies. The first stage involves restriction of activities or a requirement for prior approval for specific company action. The first stage is largely state-implemented and can vary across the country. The second stage involves public financial oversight, where state and federal regulators examine insurance statements for potential insolvency.
Only the last stage in the U.S. risk prevention process involves reserve ratios. These are described as backstops or risk-based capital, or RBC rules. An insurance company must always hold capital in amounts that exceed the minimum regulatory levels or else it may be forced to stay business operations until in compliance.
National Association of Insurance Commissioners
Each state has its own insurance regulatory body. These regulatory commissioners sometimes work in tandem to promote uniformity among the various national insurance companies. The National Association of Insurance Commissioners, or NAIC, created its own RBC formula to establish a hypothetical minimum capital level.
The NAIC uses the RBC calculator to decide if and when to take specific actions against companies that have assumed too much risk. There are no hard-and-fast rules about what reserve ratios or reserve compositions constitute actionable thresholds, however.