Loss reserves are described as the resources that are already kept aside to compensate the various potential financial obligations or loss. In some other cases the loss reserves’ amount is based on the projections of any possible losses from claims, investments or to situations which will result for a deficit of the same type may occur. This term is commonly used in varied fields which include business, home budgeting and insurance.
In the insurance industry, the term loss reserves is referred to as the resources usually held by check so that in whatever cases may be, the provider could still compensate to the claims that are filed by the clients. It is therefore important to determine how much is the amount of the loss reserves in order to keep on track on the concise projection and calculation of the size and number of claims that are most likely be filed within a specific period of time. Because there are numerous factors that may affect the size and frequency of the claims, most insurance companies are continuously refining the computation of the amount of the loss reserve to be maintained.
In the same manner, most financial institutions also maintain and project loss reserves. In this situation, the loss reserves tend to be focused on loan servicing that the institution will issue which includes the possible default on the loan’s percentage annually. The establishment of loan reserves will allow institutions to pursue in the operations despite of the negative factors and default that may threaten the limit of the cash flow in the institution.
Businesses as well as non –profit organizations are also one of those institutions that maintain reserves to compensate the overall operating expenses. This kind of provision is also known as emergency or contingency fund. Basically, the reserves are amount of funds that are meticulously kept and set aside to enable the business and the non-profit organization continue in its operation in spite of the fact that there is no enough amount of profit to maintain that level.
In addition, household budgets may be included in this type of loss reserves. Many expert financial analysts highly recommend that home budget should include the creation as well as the maintenance of loss reserves that would usually equal to a span of at least the minimum of six months to continue the operation of the expense. The concept of loss reserves help the family to be financially healthy if in the event unforeseen circumstances may come such as unemployment and illness.
Generally, creating and projecting loss reserves is very essential in any type of businesses. Insurance companies are most likely to make use of this type of date assembled to compute for the loss reserve in taking the adjusted rates included in the different types of coverage in the insurance policy. In the same manner, a financial bank institution may also use the same calculation of loss reserve to renew and revise the kinds of loans as well as the terms included in the offering.