Life & Health Insurance Practice Exam

What do reserves measure in an insurance context?

1. The administrative costs of policies

2. The future obligations to policyholders

3. The profitability of an insurance company

4. The market share of the insurer

The correct answer is: The future obligations to policyholders

In the insurance context, reserves are a critical financial measure that indicates the future obligations that an insurer has to its policyholders. Reserves are established to ensure that the company has enough funds set aside to pay future claims and benefits to policyholders when they become due. This is particularly important in life and health insurance, where claims may occur many years after the policy is issued. By maintaining a sufficient reserve, an insurer demonstrates its financial stability and ability to meet the contractual obligations outlined in its policies. These reserves are typically calculated based on various factors including the expected claims experience, the duration of the policies, and appropriate actuarial assumptions. Thus, reserves serve as a safeguard for the insurer to fulfill its commitments to its customers, ensuring that there is adequate funding available when claims arise. Other options, such as the administrative costs of policies, profitability, and market share, may relate to the overall financial health and operations of the insurance company but do not accurately describe what reserves specifically measure.