Definition of "Contingency Reserve"

A reserve for losses in excess of those that are expected. An insurer generally contributes up to 50% of premiums earned in any year to this reserve, and amounts contributed are to remain there for 10 years, subject to transfer to the surplus account either at the end of that period or before to the extent that the loss ratio exceeds 35% in any given year. Federal income taxes on amounts in the contingency reserve are deferred as long as the funds remain allocated there and are paid when they are transferred to surplus (see tax and loss bonds).