A loss reserve is an estimation of the amount an insurer would need to pay for future claims on insurance policies it underwrites. When underwriting a new policy, an insurance company takes into account two figures: an asset (the premium to be paid by the policyholder) and a claim obligation (liability for a future claim). The company sets up a loss reserve fund of usually liquid assets to cover the latter.
The loss reserves include provisional amounts intended for known claims that are due but not yet paid, known claims yet to be due, and incurred losses yet to be reported. Determining the right amount to set aside as a loss reserve is crucial for insurance companies as they are likely to incur liability at some future time. At best, the fund amounts are calculated based on estimates and projections.
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