No matter how much research an insurance company does to determine what to charge customers in premiums, they need to set aside additional funds in case they have a bad claims year due to an Ebola epidemic, forest fires, or major hurricanes. If the company runs out of money to pay insurance claims, it would be forced to shut down. So they carefully calculate how much they need to have as conditional reserves, based on premiums expected to be collected and past loss experience. State insurance commissioners and insurance guarantee associations also check to make sure insurance companies have the right amount of conditional reserves, which have to be reported separately in their financial reports.
The big three rating agencies, Moody’s, S&P Global Ratings, and Fitch Ratings come up with a benchmark called the Insurer Financial Strength Ratings (IFSR), which represents their opinion of the insurance company’s financial health. Analysts keep a close eye on these ratings to look for any changes to a company’s conditional reserves over time.