Prop. 103 and Roxani Gillespie

Harvey Rosenfield is upset because Gillespie has announced that most of the rollbacks promised by Prop. 103 will not be forthcoming because the companies are not making that much money.

Harvey does not trust the insurance companies’ figures. He claims that they are hiding exorbitant profits in their reserves.

Insurance companies aren’t the only businesses that use reserves. They are an accounting necessity so that expenses attributable to a particular time period are charged against the income for that period. I would like to give a simplified version of how reserves work.

If your only asset is your $1,000 paycheck for a month, you could say when you get paid that you had a net worth of $1,000. Not so if you have any bills to pay. Say that you pay bills you owe of $700.

It looks like that leaves you with a net worth of $300 for the month. However, you generally spend $100 for groceries. You have to set up a reserve for that $100. That gives you a net worth of only $200.

From past history you know that you average an emergency expenditures of about $100 a month. A contingency reserve must be set up for this. This now gives you a net worth of $100.

If your calculations are correct, you will end up the month with a net worth of $100, not the $1,000 you started with. Insurance companies do the same thing.

HARRY D. BOYD

Van Nuys