What is a "reserve" in the context of insurance claims?

In the context of insurance claims, a "reserve" refers to an estimate of the amount the insurance company will need to pay out for a claim. This estimate takes into account various factors, such as the potential costs of settling the claim, legal fees, and other related expenses. Setting this reserve helps insurers ensure they have adequate funds available to cover future payouts associated with claims that have been reported or are expected to arise. Accurately estimating reserves is critical for an insurer's financial health, as it impacts both their liabilities on the balance sheet and overall profitability.

Establishing reserves also involves regular review and adjustment as new information becomes available about the claim, including developments in legal proceedings, negotiation outcomes, or changes in the expected cost of repairs or medical treatment. This dynamic nature of reserves reflects the ongoing responsibilities insurers have in managing claims effectively and ensuring they are compliant with regulatory requirements.