A claims reserve is a money reserve an insurance company deliberately sets aside to use to pay unsettled claims in the future because it takes time to process claims and make sure they are covered and legitimate. Insurers use this fund to pay benefits to policyholders who file legitimate claims.
Because claims reserves are meant to pay for incurred but unsettled claims, they represent liabilities for an insurance company. In other words, they are potential financial obligations to policyholders. This money comes from premiums; however, it can be difficult to determine the amount to set aside for claims. Usually, insurers rely on past data on losses to statistically calculate a suitable and reasonable amount.
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