Equalization reserve definition
/What is an Equalization Reserve?
An equalization reserve is a cash fund maintained by an insurer, which is only to be accessed in the event of an unexpected claims loss. This reserve is needed for losses from such events as hurricanes, flooding, fires, hail storms, and tornadoes. It is especially important to maintain such a reserve when an insurer is insuring a large number of properties within a specific geographic area, since an unexpected loss event in that area could cause substantial losses for the insurer.
Example of an Equalization Reserve
As an example of an equalization reserve, a massive hurricane hits an area where an insurer has insured a number of properties; the large number of losses requires the firm to access its equalization reserve. By having the reserve, the insurer has sufficient funds to pay for all of the claims arising from the hurricane event.