Statutory Reserves

If you keep your money in a bank in the U.S., that bank invests some of the money, and hangs on to a percentage of it. While they might be tempted to invest all of it to get the most bang for their buck, it’s illegal.

The Federal Reserve sets a required reserve ratio...say, 10%. That means the banks must keep 10% of each deposit on hand, and can lend out the remaining 90% of incoming cash to businesses and consumers to make some moolah. Reserve requirements protect consumers and banks alike from a run on the banks, i.e. when everyone tries to take out all their money at the same time. But reserve requirements serve another purpose: the bank has to have money on hand for when you need to pay your bills and go to the ATM. Cha-ching.

Statutory reserves are like reserve requirements for banks, except for insurance companies, and they’re mandated by states instead of by the Fed. States require insurance companies to keep a certain amount of liquid reserves on hand so that, if someone needs an insurance payout, they’ll get it...as promised. Otherwise, insurance companies, like banks, might invest a little too much of their money. When a catastrophe hits, if too much of their money is tied up in assets...oh boy. Not the time or place. After all, that’s the one thing insurance companies are paid for: those moments when you really need them. Someone's gotta pay out those approved insurance claims.

Statutory reserve requirements are up to the states in the U.S., and can apply to health insurance, property insurance, life insurance...take your pick of your favorite insurance. We know you have one. Come on. Fess up.