loss reserving

Loss reserving is the process insurance companies use to estimate the amount of money needed to pay future claims for policies already in force. Because claims can take years to settle, insurers set aside a financial reserve, reflecting an educated prediction of future payments based on past claims data. This ensures the company has sufficient funds to meet its obligations, maintain financial stability, and accurately report its financial health. Proper reserving is crucial for risk management and regulatory compliance, balancing the need to hold enough reserves without tying up excessive capital.