Why is proper reserving important for insurance companies?

Proper reserving is essential for insurance companies primarily because it directly impacts their financial health and stability. When an insurance company sets aside appropriate reserves for claims, it ensures that there are sufficient funds available to cover future liabilities. This practice helps maintain financial strength and solvency, allowing the insurer to meet its obligations to policyholders as claims arise.

If a company engages in improper reserving, it may significantly misrepresent its financial position, potentially leading to financial strain. This can result in an inability to pay claims, which not only impacts the policyholders but can also damage the company's reputation and credibility in the marketplace. Additionally, regulatory bodies often require insurance companies to maintain adequate reserves to safeguard against insolvency risks, meaning that improper reserving can have legal implications as well.

In summary, proper reserving is crucial for ensuring that an insurance company can sustain its operational integrity and fulfill its commitments to its insured, thus safeguarding the interests of both the company and its policyholders.