Can reserves be reduced based on projected third-party recovery or projected reimbursement from aggregate excess insurance?

• A. Yes, if the recovery is probable
• B. No, reserves shall not be decreased
• C. Yes, for larger employers only
• D. Only with Director approval

Answer: (B)

Reserves are set aside to cover the expected cost of losses that have already occurred or are incurred but not yet paid. They must reflect actual obligations, not contingent inflows. Projected third‑party recoveries or reimbursements from aggregate excess insurance are uncertain and may be delayed, disputed, or denied. If reserves were reduced based on these projections, the financial statements could understate liabilities and threaten solvency if the recoveries do not materialize as expected. The prudent approach is to keep the reserve amount intact until the recovery is realized, at which point the cash or receivable is actually received and can be recognized.