Los Angeles Claims Adjuster Property and Causality Practice Exam

What does the insurance company establish when a loss occurs to estimate the claim payout?

1. Payment terms

2. Claim timeline

3. Reserves

4. Policy adjustments

The correct answer is: Reserves

When a loss occurs and a claim is submitted, the insurance company establishes reserves to estimate the potential payout for the claim. Reserves are the funds that an insurer sets aside to cover its future obligations to policyholders based on the expected costs of claims. This involves a careful calculation of the anticipated expenses related to the claim, including repair costs, settlement amounts, and any legal expenses that may arise. By establishing reserves, the insurer can ensure that it has sufficient funds to meet its obligations, which helps in maintaining financial stability for both the insurer and the insured. The process of setting reserves is critical for the financial health of the insurance company and aids in accurate financial reporting and risk management. Setting payment terms, developing a claim timeline, or making policy adjustments are related to the claims process, but they do not directly address the estimation of the claim payout itself. Reserves specifically represent the insurer's commitment to cover the potential financial responsibility stemming from the claim, making this concept central to the management of insurance claims.