Art. 19 · What your balance sheet can absorb · 3 min read
The importance of reserves
A reserve is not idle money. It is a self-funded excess for the whole business, and it changes what you need to buy.
Two identical businesses, identical risks. One has £400,000 of accessible cash; the other has £15,000. They should not carry the same insurance, because they do not have the same capacity to absorb a loss, and capacity is the thing that decides where the transfer boundary sits.
The reserve does two distinct jobs, and it is worth separating them.
It funds losses you have chosen to keep. With a real reserve, a £25,000 excess is an operational irritation. Without one, it is a crisis, so you buy a £1,000 excess and pay for the privilege every year forever.
It buys time. This is the underrated one. Most businesses that fail after a large loss do not fail because the claim was refused. They fail because the money arrived in March and the payroll was due in January. Insurance settles eventually; suppliers, staff and landlords do not wait for eventually.
A reserve only counts if it has three properties. It must be liquid: reachable in days, not tied up in something you would have to sell badly. It must be ring-fenced: a reserve that is also the growth budget and also the tax money is not a reserve, it is a story. And it must be sized against your stated bar, not against a round number that felt comfortable.
| Accessible reserve | Excess you can carry calmly | What that typically does to premium |
|---|---|---|
| £15,000 | £1,000 | Highest price per pound of cover |
| £75,000 | £10,000 | Meaningful reduction on frequent-claim classes |
| £400,000 | £50,000 | Substantial: you are now insuring only the tail |
Illustrative relationships, not quotes. The actual premium effect depends entirely on class of business and claims history, which is exactly why this is worth having priced rather than assumed.
Use it
- Name the account. A reserve that lives in a separate, named account with a written rule about who can draw on it behaves completely differently from one that lives in the current account.
- Size it against the bar from Article 18. Not against a round number, and not against last year's worst month.
- Then re-price your excesses. The reserve is only worth holding if you actually use it to buy cheaper cover.