What component is included in loss reserves?

Loss reserves are essential components of an insurance company’s financial statements, reflecting the expected cost of claims that have been incurred but not yet settled. The correct answer, claims incurred but not reported (IBNR), is a vital part of these reserves.

IBNR represents an estimate of future claims that the insurer anticipates will arise from incidents that have already occurred but have not yet been reported to the insurance company. This is crucial because it helps ensure that the insurer sets aside enough funds to meet future payment obligations, thereby stabilizing the company’s financial health and ensuring that it can honor claims when they are eventually filed.

Including IBNR in loss reserves allows insurance companies to adhere to accounting principles that mandate reserving for all potential liabilities, ensuring that financial statements provide a true picture of the company’s obligations. In essence, IBNR is an acknowledgment of the timing differences between when a claim occurs and when it is reported, reflecting the insurer’s ongoing commitment to its policyholders.

The other options do not belong in loss reserves in the same way:

• Settled and closed claims are already resolved and do not require further reserves.

• Policy marketing expenses are operational costs and not related to claims liabilities.

• Premium adjustments pertain to adjustments in the