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What characteristics of the insurance business make reserves necessary?

What characteristics of the insurance business make reserves necessary?

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Answer #1

The following characteristics of the insurance business make the reserves necessary:

1. The claims have been reported but the insurance company is still in the process of settlement. These are called unpaid reserves.

2. The insured may opt to leave the dividends with the insurer. In such a case insurance company establishes a reserve to fulfill the future dividends payment.

3. In some cases the settlement is not made fully, the insured may opt to receive only the interest part of the settlement amount and leave the rest with the insurance company. In such a case the insurance company establishes a reserve to the amount left with the company, which represents a future obligation.

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