What is the purpose of setting 'reserves' on a claim?

Loss reserves are the insurer's estimate of total payments expected on a claim. Components: (1) Indemnity reserve — the estimated payment to the insured or third party; (2) Defense reserve — estimated attorney fees, expert costs, court costs for liability claims; (3) Adjustment expense reserve — adjuster's time, investigation costs, other handling expenses. Why reserves matter: (1) Financial reporting — reserves are liabilities on the insurer's balance sheet; (2) Premium setting — historical reserves predict future losses, driving rates; (3) Reinsurance — many treaties trigger at reserve levels; (4) Solvency — regulators monitor reserves to ensure adequate funds for unpaid claims; (5) Statistical data — reserves contribute to industry data shared through bureaus. Reserve setting: (1) Initial reserve — set when claim is opened based on initial information; (2) Updates — reserves are revised as more information becomes available (damages clarified, liability disputed, treatments completed); (3) Closing — when claim resolves, the actual payment closes the reserve. Adjusters must set reserves carefully — too low understates the insurer's exposure; too high overstates and may trigger reinsurance prematurely. State regulations and insurer policies guide reserve methodology. Common methods: average claim value, individual case reserves, formula-based reserves, statistical reserving for bulk claims.