Balance sheet accounts set up to report the liabilities faced by an insurance company under outstanding insurance policies. Their purpose is to secure as true a picture as possible of the financial condition of the organization (by permitting conversion of disbursements from a paid to an accrual basis). The company sets the amount of reserves in accord with its own estimates, State laws, and recommendations of supervisory officials and national organizations. Regulatory agencies can accept the reserves or refuse them as inadequate or excessive. For Blue Cross plans, for example, reserves are set aside to cover average monthly claims and operating expenses for some period of time. Reserves, while estimated, all are obligated amounts and have four principal components: reserves for known liabilities not yet paid; reserves for losses incurred but unreported; reserves for future benefits; and other reserves for various special purposes, including contingency reserves for unforeseen circumstances.
Potential capacity to respond to maintain vital functions (e.g., pulmonary reserve, the extra volume of air that the lungs can inhale or exhale when breathing to the limits of capacity, as in times of stress).