Los Angeles Claims Adjuster Property and Causality Practice Exam

What is the main purpose of establishing loss reserves in insurance?

1. To predict future losses

2. To estimate total payment on a claim

3. To determine underwriting guidelines

4. To manage policyholder risks

The correct answer is: To estimate total payment on a claim

The primary purpose of establishing loss reserves in insurance is related to the estimation of total payment on a claim. Loss reserves are essentially funds that an insurance company sets aside to cover expected future claim payments. When a claim is reported, the insurer does not immediately know the full amount that will ultimately be paid out. Therefore, it develops a reserve based on the best estimates of the potential losses. This estimation accounts for various factors such as the type of insurance, historical loss data, and the nature of the claim itself. By accurately estimating these reserves, insurers can ensure they have sufficient financial backing to fulfill their obligations when claims are finally settled. This process is crucial for maintaining the solvency of the insurance company and for keeping financial statements reflective of true liabilities. Effective loss reserves管理 also helps in regulatory compliance and overall financial planning for insurers. Other options, while reflective of aspects of the insurance process, do not capture the essence of establishing loss reserves as accurately as estimating total payment. Predicting future losses is a broader aspect of risk management, underwriting guidelines pertain to the policies and standards a company uses to write new business, and managing policyholder risks involves overall risk mitigation strategies rather than specifically focusing on claims payments.