Contingency reserve definition

What is a Contingency Reserve?

A contingency reserve is retained earnings that have been set aside to guard against possible future losses. A contingency reserve is needed in situations where a business occasionally suffers significant losses, and needs reserves to offset those losses. If the contingency against which a reserve was created does not arise, then the reserve can be released.

By setting up a contingency reserve, a board of directors is sending a signal to shareholders that the reserved funds are not available for distribution to them as dividends.

Who Uses a Contingency Reserve?

Contingency reserves are commonly used by insurance companies, which have to maintain substantial reserves to guard against major loss events. For example, an insurance company might set up a contingency reserve against losses arising from a major hurricane that passed over Florida.