Loss Reserve
What Does Loss Reserve Mean?
A loss reserve is an estimate of the amount an insurer needs to set aside to pay for future claims on the insurance policies it underwrites. When underwriting a new policy, an insurance company considers two figures: an asset (the premium to be paid by the policyholder) and a claim obligation (the liability for a future claim). To cover this claim obligation, the company establishes a loss reserve fund, typically consisting of liquid assets. Adequate reserves are one of the factors behind the financial strength ratings that shoppers check when comparing the best car insurance companies.
Insuranceopedia Explains Loss Reserve
Loss reserves include provisional amounts set aside for known claims that are due but not yet paid, known claims that are yet to be due, and incurred losses that have yet to be reported. Accurately determining the appropriate amount to allocate as a loss reserve is crucial for insurance companies, as they will likely incur liability at some point in the future. Generally, the fund amounts are calculated based on estimates and projections. When a catastrophic event produces thousands of hurricane insurance claims or similar mass payouts in a short window, insurers draw from these reserves to settle policyholders’ losses without delays.
