A reserve is the amount an insurer or a company sets aside for a claim or a book of claims that has been incurred but not yet paid. Its adequacy depends on how much the claims will cost and how long they will take to close.
Reserving is a forecast of cash that will leave the institution later. It rests on the expected severity of each claim, the number of claims and the time to resolution, and it is revised as claims develop.
Litigation is the source of much of the uncertainty. A claim that goes to suit is governed by court calendars, motion practice and settlement posture, so reserving on legal matters benefits from a distribution of outcomes and durations, not a single expected value.
A reserve is not a payment and not a prediction for one claim. It is a balance-sheet estimate that has to be defended with evidence.
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