A type of reserve that an insurance company (insurer) is required to create as a cushion against losses (generally, fluctuations) to its invested assets (investments). The reserves created are designed to absorb any fluctuations in such assets over time. In general, it represents an amount set aside, on an insurer’s balance sheet, to reflect the difference (or a portion thereof) between purchase price and current market price of assets/ investments if an insurer’s assets (investments) are valued on the basis of the current market price (market value).
Asset fluctuation reserves mainly include the asset valuation reserve (that aims to absorb both realized and unrealized, credit-related capital gains and losses) and the interest maintenance reserve that captures all realized, interest-related capital gains and losses on fixed-income assets.
Asset valuation reserve (AVR) is a statutory reserve that is created for the purpose of accounting for gains and losses in a financial institution’s invested assets. The reserve is designed to absorb both realized and unrealized, credit-related capital gains and losses. It consists of a default component, which provides a buffer against credit-related losses on fixed-income assets, and an equity component, which covers all types of equity investments.
Interest maintenance reserve (IMR) is created to absorb the effect of interest-related fluctuations in an insurer’s fixed-income investments (notes, bonds, etc.) and amortizes any resulting gains and losses into income over the remaining life of the investments.
Asset fluctuation reserves are also known as revaluation reserves.
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