What "Release of reserve" really is ?

[Duc Thinh Vu]

If reserves are increased over the year, more funds have to be set aside to back those reserves and those funds therefore cannot be released as profit for the shareholders. Hence there is less profit arising in that period than otherwise would have been the case.

Hence the 'minus increase in reserves' item in the profit calculation.

Hi, thanks for your help until now you are very nice. Do you think that we can imagine the "Increase in reserve" as some kind of "expense" (not real expense as no cashflows) in the period ? Like, say, the "expense to increase reserve to meet the reserve requirement", but in this case, the insurance company pays to himself.

 

[Lindsay Smitherman]

Yes, we could think of it in that way, although bear in mind that:

• for a true 'expense', once the money has been paid out to meet those expenses it is gone (and this therefore has a direct impact on profit, reducing it)

• when the company is setting aside money to increase the reserves, this is only a temporary reduction in profit and the money is still available for the company to use at a future date to pay its claims/expenses (at which point profit is increased by the amount of reserve that is then released for this purpose). [If the company puts aside 100 in reserves now, profit will be 100 lower during this period, but there will be a total of +100 of profit emerging in future periods as this reserve is released.]