What are reserves in the context of insurance?

In the context of insurance, reserves are funds that an insurance company must set aside to ensure it can pay future claims. These reserves are calculated based on the anticipated payout of claims that may arise from policies currently in force. Regulations often dictate the minimum amount of reserves that insurers must maintain, ensuring the insurer remains solvent and capable of meeting its financial obligations to policyholders.

This requirement serves as a financial safety net, providing peace of mind to policyholders knowing that the insurer is prepared to honor claims as they occur. Reserves are ultimately a critical part of an insurer's financial health, representing a commitment to policyholders that funds are allocated for future liabilities. This differs from tangible assets, cash value in policies, and investments, which do not specifically pertain to obligations for future claims. These other financial aspects serve different purposes within the company's overall operations and financial strategy.