Basically, all the money that a company takes in in premium is used for various things, from payments to wages. However, the company needs to account for payments for losses that may take some time to be paid (Larger property damage claims and injury claims, specifically, as they can pend for months to years).
What the company does is sets a "reserve" based upon the information they have. This will take money out of the large fund and set it aside for payment of a claim down the line. This assures that they will have the money later. These reserves are changed and set as necessary, taking into account similar scenerios, interest and expenses.
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June 27th, 2008 at 10:34 am
All insurance companies are required to keep a certain amout of premiums they've collected in "reserve" to pay out losses.
June 27th, 2008 at 10:34 am
Basically, all the money that a company takes in in premium is used for various things, from payments to wages. However, the company needs to account for payments for losses that may take some time to be paid (Larger property damage claims and injury claims, specifically, as they can pend for months to years).
What the company does is sets a "reserve" based upon the information they have. This will take money out of the large fund and set it aside for payment of a claim down the line. This assures that they will have the money later. These reserves are changed and set as necessary, taking into account similar scenerios, interest and expenses.
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