We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What are Loss Reserves?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 25,575
Share

Loss reserves are resources that are set aside to offset various types of financial loss or obligation. In some cases, the amount of these resources is based on projections of possible loss from investments, insurance claims, or other situations where a deficit of some type could occur. The term is used in many different fields, including insurance, business, and even in home budgeting.

When used in the insurance industry, a loss reserve is the resources that are held in check, so the provider can honor any claims that are presented by clients. Determining the amount of the reserve to keep on hand depends on the accurate calculation and projection of the number and size of claims that are likely to be filed within a given time period. Because many factors can impact the frequency and size of claims, insurance providers are constantly refining the calculation regarding the amount of insurance loss reserve they should maintain.

In like manner, many financial institutions also project and maintain loss reserves. In this scenario, the reserves tend to focus on the servicing of loans issued by the institution, including the potential for default of a percentage of the loans per annum. The creation of loan loss reserves allows the institution to continue operations in spite of any defaults or other negative factors that threaten to limit the cash flow of the institution.

Businesses and non-profit organizations also tend to maintain loss reserves to cover general operating expenses. This type of provision is sometimes referred to as a contingency or emergency fund. Essentially, the reserves are funds set aside to allow the company or the non-profit organization to continue operations even if there is not an adequate amount of income generated to maintain the current level. When and as required, funds are withdrawn from the reserve while the officers and other key players find ways to restore financial health to the organization.

Even home budgets may include a type of loss reserves. Many financial analysts recommend that households create and maintain reserves that are equal to at least six months of normal operating expenses. The idea is that a loss reserve ratio of this type provides adequate financial support for the household during periods of illness or unemployment, when cash flow is likely to be low or non-existent.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-are-loss-reserves.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.