How much capital reserves should a life insurance company in the USA maintain?

Capital reserves in life insurance refer to the funds an insurance company sets aside to ensure it meets its future obligations to policyholders. These reserves act as a financial buffer, helping the insurer cover claims, policy payouts, and other liabilities, even in challenging financial circumstances.

The capital reserves are set based on regulatory requirements, often determined by federal and state laws. Still, the specifics depend on several factors, including the company's size, risk profile, and types of policies sold.

Let’s learn more about the capital reserves.

• Risk-Based Capital (RBC) Requirements: U.S. life insurance companies must adhere to Risk-Based Capital (RBC) guidelines set by the National Association of Insurance Commissioners (NAIC). The risks include:

a. Underwriting Risk (the risk of claims exceeding projections)

b. Investment Risk (market risk from invested premiums)

c. Interest Rate Risk

Typically, insurers are required to hold a minimum of 200% of their RBC level. Falling below this can trigger regulatory intervention.

• Surplus Requirements: Apart from required reserves, companies often hold additional capital (known as a surplus) to further safeguard against unforeseen circumstances.
• General Guidelines: Most life insurance companies maintain reserves between 5% to 10% of their total liabilities, but the exact amount is determined by the specific risks associated with their policies.

Life insurance companies in the U.S. typically maintain significant capital reserves, both to meet regulatory requirements and to protect policyholders in case of unexpected financial stress.