Loss Reserve
Money set aside by insurance companies to pay for claims that have been reported but not yet settled, as well as claims that have occurred but haven't been reported yet. These reserves ensure the insurer has adequate funds to meet future claim obligations.
Example
“The insurance company increased its loss reserves by $2 million after Hurricane Maria, anticipating numerous claims that hadn't been reported yet due to communication disruptions.”
Memory Tip
Think 'Reserve = Ready Emergency Stash Extra Resources Very Early' - money kept ready for future claim payments.
Why It Matters
Adequate loss reserves ensure your insurance company can pay your claims even years after they occur. Insufficient reserves can lead to insurer insolvency, leaving policyholders without coverage or forcing state guarantee funds to step in with limited protection.
Common Misconception
Many people think reserves are just extra profit sitting in bank accounts. Actually, reserves are calculated liabilities based on actuarial estimates and regulatory requirements, and using them for anything other than paying claims can result in regulatory penalties and financial instability.
In Practice
XYZ Insurance had 1,000 auto accident claims reported but not settled, estimating they'll pay an average of $15,000 each, requiring a $15 million case reserve. They also estimated $5 million in IBNR (incurred but not reported) claims, creating total loss reserves of $20 million. When actual settlements averaged $16,000, they needed to adjust reserves upward to cover the additional $1 million in costs.
Etymology
From 'loss' (Old English 'los') and 'reserve' from Old French 'reserver,' meaning to keep back or set aside for future use.
Common Misspellings
Compare insurance quotes and save
Related Terms
More in insurance
Other insurance terms you should know
See Also
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.