Claims equalisation reserve

The claims equalisation reserve is a balance sheet item showing funds an insurance company has (nominally) set aside in order to smooth fluctuations in the cost of claims. The claims equalisation reserve is not required and is used at a company's discretion.

It produces more consistent revenues, but it is obviously something that lends itself to abuse.

There is a certain irony in there being a recognised balance sheet item that allows insurance companies to use a (limited) form of profit smoothing — something that accounting standards are designed to make as difficult as possible in any other industry. There is, of course, a reason for this: the availability of actuarial estimates of the "normal" level of claims provides a sounder basis for smoothing.

Copyright © 2005-2016