Reviewed by Oct 05, 2020| Updated on
It can also be thought of as the sum set aside by the insurance companies for fulfilling future insurance claims that have been already filed but not yet reported to the insurance company or that are yet to be settled. The way the balance sheet reserves must be maintained is instructed by the law.
The concept is created by the law to ensure consumers that an insurance company can pay for claims, losses, or the other benefits as promised to claimants.
Usually, the following three types of reserves are used by property and casualty (P&C) insurers: - Unearned premium reserves - Loss and loss adjustment reserves - Incurred but not reported (IBNR) reserves
The reserving policy can have a significant impact on the insurance company's profitability. Over-reserving funds may result in leaving behind fewer funds for investments, while under-reserving can boost profitability as there are more funds for the company to invest.
The regulator closely monitors the reserves set aside by the insurance companies to make sure that there are adequate reserves are set aside on the balance sheet.