Contingency reserve definition

What is a Contingency Reserve?

A contingency reserve is retained earnings that have been set aside to guard against possible future losses. A contingency reserve is needed in situations where a business occasionally suffers significant losses, and needs reserves to offset those losses. By setting up a contingency reserve, a board of directors is sending a signal to shareholders that the reserved funds are not available for distribution to them as dividends.

Who Uses a Contingency Reserve?

Contingency reserves are commonly used by insurance companies, which have to maintain substantial reserves to guard against major loss events.