What are "insurance reserves"?

Insurance reserves are funds that insurers specifically allocate to ensure they can meet future obligations related to claims made by policyholders. These reserves are critical for managing the financial stability of an insurance company, as they represent a liability on the insurer’s balance sheet that reflects the expected future payouts related to current policies. These reserves are not profits; instead, they are essential for ensuring that the insurer has sufficient funds available to pay claims as they arise, which helps maintain the trust and financial safety for policyholders.

Understanding this concept is crucial because it highlights the distinction between operational funds and the obligations an insurer must fulfill. Without adequate reserves, an insurer could face financial difficulties, impacting its ability to pay claims and, consequently, its overall viability in the market.