What are loss reserves in insurance?

Loss reserves refer specifically to the money that an insurance company sets aside to pay for claims that it expects to incur in the future. This is an essential aspect of an insurer's financial management, as it ensures that sufficient funds are available to cover claims that have already occurred but have not yet been settled or reported.

The process of calculating loss reserves involves estimating both reported losses that may still have outstanding claims and unreported claims that could arise from events that have already happened. These reserves are critical for ensuring that the insurer remains solvent and can fulfill its obligations to policyholders when claims arise.

The other choices do not accurately represent what loss reserves are within the insurance sector. Funds earmarked for new policies pertain to underwriting and acquiring new business rather than covering existing claims. Retained earnings refer to the portion of net income that is retained in the company rather than distributed to shareholders, and funds allocated for marketing and acquisition relate to promoting products and gaining new customers, not to claim payments.