What is the primary purpose of reserves in insurance?

The primary purpose of reserves in insurance is to cover future claims. Insurers are required to set aside a certain amount of money, known as reserves, to ensure that they can meet their future obligations to policyholders. These reserves account for the anticipated costs of claims that have been reported as well as those that have been incurred but not yet reported. By maintaining appropriate reserves, insurance companies ensure financial stability and the ability to pay out claims when they arise, thus protecting the interests of policyholders and maintaining trust in the insurance system.

While premium rates are influenced by various factors, including claims history and risk assessment, reserves specifically pertain to the funds set aside for claim fulfillment. Marketing activities and operational costs, while important for running an insurance business, are not the focus of reserves; these activities are typically funded through other revenue streams.