Loss Reserve
Money that insurance companies set aside to pay future claims that have already occurred but haven't been fully settled yet. These reserves ensure the insurer can meet its obligations to policyholders for both reported and unreported claims.
Example
“The insurance company increased its loss reserves by $50 million after Hurricane Maria to cover anticipated claims that hadn't yet been reported or fully processed.”
Memory Tip
Think 'Reserve for Rainy Days' - insurance companies reserve money today to pay for claims that will be settled tomorrow.
Why It Matters
Loss reserves ensure insurance companies remain solvent and can pay claims even years after policies expire. Adequate reserves protect policyholders and maintain public confidence in the insurance system.
Common Misconception
Some people think loss reserves are profits that insurance companies are hoarding. Actually, reserves are liabilities - money already earmarked for paying claims - and using them for other purposes would be both illegal and financially irresponsible.
In Practice
After a major storm, XYZ Insurance receives 1,000 claims totaling $20 million in reported damages, but estimates another 500 unreported claims worth $8 million will come in over the next six months. They establish a $28 million loss reserve to cover all expected claims from this event. As claims are actually paid out over the following year, the reserve is drawn down. If final claims total only $25 million, the remaining $3 million strengthens their surplus, but if claims exceed $28 million, they must add to the reserve.
Etymology
Combines 'loss,' referring to insurance claims, with 'reserve,' from Latin 'reservare' meaning to keep back or save, reflecting the practice of setting aside funds for future obligations.
Common Misspellings
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See Also
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