What does "accounting for loss reserves" mean?

"Accounting for loss reserves" refers to the estimation of future liabilities for unpaid claims. In the context of insurance, loss reserves are the amounts set aside by an insurance company to cover anticipated future claim payments that have been incurred but not yet settled. This process is crucial for accurately assessing an insurer's financial health and ensuring that sufficient funds are available to meet obligations to policyholders.

By estimating these liabilities, insurance companies can track their potential future payouts more effectively. This practice not only reflects an insurer's responsibility to policyholders but also plays a significant role in financial reporting and regulatory compliance, ensuring that the company remains solvent and can fulfill its commitments when claims are filed. Accurately accounting for these reserves helps maintain the stability of the insurance industry as a whole.