Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Claims Reserves

What it is:

Also known balance sheet reserves, claims reserves are accounting entries that reflect money an insurance company sets aside to pay future claims.

How it works (Example):

For example, let's assume that Company XYZ provides insurance to people on the East Coast. A big storm comes and flattens many of the houses. Company XYZ knows it is going to receive a lot of claims, so it creates a claims reserve on its balance sheet to reflect the amount of the claims it thinks it is going to have to pay.

Big storms aren't the only thing that prompts claims reserves. Insurance companies often set up the reserves to ensure they have enough set aside to pay out claims in the normal course of business. The reserves often equal the value of claims that have been filed but not paid out yet.

Why it Matters:

Claims reserves are recorded as liabilities on the balance sheet. In some industries, such as insurance, regulators set standards for how and when to set up balance sheet reserves.