What is the purpose of a claims reserve on an insurer’s balance sheet?

The purpose of a claims reserve is to ensure that an insurer has sufficient funds set aside to cover future claims that have been reported but not yet settled, as well as those that may be incurred but not yet reported. This is a critical component of an insurer's financial management, as it provides a financial safety net for expected claim payments. By maintaining a claims reserve, insurers can uphold their contractual obligations to policyholders, ensuring that they can pay out claims as they arise. This practice also helps in financial planning and maintaining the insurer's solvency, supporting the overall stability of the insurance system.

While other options might touch on aspects of an insurance company’s operations, they do not accurately reflect the specific purpose of a claims reserve. For instance, the calculation of premiums involves underwriting considerations and risk assessment rather than merely the existence of reserves, which are dedicated solely to claims. Similarly, setting aside funds for marketing or limiting the number of claims processed falls outside the function of a claims reserve, which is exclusively tied to guaranteeing future claim payouts.