Property and Casualty Insurance Basics Practice Test 2025 - Free Practice Questions and Study Guide

The main function of the insurer's reserves is to pay future claims. Insurance companies collect premiums from policyholders and are required to maintain reserves to ensure they can meet their obligations when claims arise. These reserves act as a financial safety net, allowing insurers to fulfill their promises to policyholders by having the necessary funds to cover claims that may be incurred over time.

Allocating adequate reserves is crucial because it not only supports the immediate claims but also ensures the financial stability and solvency of the insurer in the long term. This means that even if many claims occur at once, or if there are claims for long-term policies, the insurer will have the necessary funds available to provide the required payouts.

While investing in new policies, distributing dividends to shareholders, and covering administrative costs are all important aspects of running an insurance company, these functions do not align with the primary purpose of reserves, which is explicitly to ensure that sufficient funds are available for claims as they arise.