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Building and Using Insurance Reserves for Sustainability

By Annmarie Novotney, CPA, Director at Blue & Co.

Not-for-profit organizations have been dealing with changing circumstances on many fronts over the last five years. Part of this changing landscape involves rising insurance premiums and increased claims related to property, general liability, and cybersecurity. As a result, organizations must prepare for higher deductibles, and other increases in costs as they relate to insurance. Those not-for-profit organizations, especially membership organizations with significant property holdings, are especially impacted by this change in market conditions.

It is critical to an organization’s sustainability to have an adequate level of short-term cash reserves and liquidity resources for general operational flexibility, and for ensuring that all organizational commitments are met in a timely fashion.

Above and beyond short-term cash reserves, organizations should also consider building reserves to fund insurance deductibles as claims are incurred. Such reserves (often designated by the Board of Directors) are funded so that intermittent claims can be managed without disrupting already tight operating budgets.

In considering building an insurance reserve fund, organizations should consider the following areas:

Understanding the risk landscape (past, present, and future)

Collaboration with an organization’s current insurance provider, and property managers or housing team members can aid in understanding what claims have been incurred previously, properties at risk for issues now, and what deferred maintenance issues might be present in the future. Understanding risks by geographic location as it relates to weather and catastrophic events is also helpful in determining how much to reserve and how sustainable that reserve will be over time.

Starting a reserve fund

Organizations can take funds already in existence and formally designate them (through Board resolution) to function as an insurance reserve that cannot be spent on other purposes. Such designations can formally separate these funds from operating cash and other financial assets and keep reporting and tracking of these funds segregated within the organization’s financial statements.

Organizations can also fund a new reserve by designating surplus dollars annually be deposited into an insurance reserve. Creating a one-time assessment charged to members, or charging a new annual fee are also options to establish a reserve fund or continue to fund reserves once established.

Investing your reserve fund

Organizations need to consider where established reserve funds will be housed and how they will be invested. Organizations should consider a separate investment policy statement for reserve funds. Keeping reserves in short-term insured bank accounts allows for some return on those funds without taking on market risk. Certificates of deposit or sweep accounts can also be utilized if they are tailored in a way so as to not lock up all funds for specified periods of time.

Depending on the size of the reserve, it might make sense to invest in longer-term opportunities to increase investment return. In all cases, liquid cash will need to be accessible to some degree for those claim deductibles should they occur annually.

Drawing from your reserve fund

Organizations also need to consider how to spend from reserve funds. A policy on spending should be established and should include what constitutes an approved expense, how often reserves can be drawn upon, and what approvals are needed to draw (approvals usually involve some sort of Board or Finance Committee approval). Determining a minimum threshold that must be left in the reserve at all times should also be considered.

Blue & Co.’s Not-for-Profit Services Team advises organizations on ways to improve both the balances and the utilization of reserves and liquidity resources to enhance sustainability over time. Please reach out to your local Blue & Co. advisor with any questions regarding these recommendations.

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