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Simple English definitions for legal terms
loss reserve
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A quick definition of loss reserve:
A loss reserve is money that an insurance company sets aside to pay for future claims. It's like a savings account for when bad things happen. The insurance company estimates how much money they will need to pay for claims that haven't happened yet, and they put that money in the loss reserve. This helps make sure that the insurance company can pay for any claims that come up in the future.
A more thorough explanation:
A loss reserve is a type of reserve that represents the estimated value of future payments for losses that have been incurred but not yet reported. This type of reserve is commonly used by insurance companies to ensure that they have enough funds to cover future claims.
- An insurance company sets aside a loss reserve of $10 million to cover future claims related to a recent natural disaster. This reserve represents the estimated value of future payments for losses that have been incurred but not yet reported.
- A bank sets aside a loss reserve of $5 million to cover possible losses from defaulting loans. This reserve ensures that the bank has enough funds to cover any losses that may occur in the future.
These examples illustrate how loss reserves are used to ensure that companies have enough funds to cover future liabilities. By setting aside funds in a loss reserve, companies can protect themselves from financial losses and ensure that they are able to meet their obligations to customers and stakeholders.