What is the primary objective of claims reserving in insurance?

The primary objective of claims reserving in insurance is to estimate the future cost of claims. This process involves setting aside a certain amount of money to cover anticipated claim payments that might be settled in the future. Accurate claims reserving ensures that the insurer has enough funds allocated to meet its obligations when claims are processed, allowing the company to maintain financial stability and meet regulatory requirements.

Estimating the future costs of claims is crucial for effective financial management, as it directly impacts an insurance company's balance sheet and profitability. A well-calibrated reserve can help prevent scenarios where an insurer might be ill-equipped to handle the settlements, which could lead to liquidity issues and undermine the trust of policyholders.

While limiting overall liability, predicting market trends, and enhancing customer service are important aspects of an insurance company's operations, they do not encapsulate the primary purpose of claims reserving. Instead, those aspects might be the result of effective claims reserving practices in maintaining a sustainable business model.