Arkansas Insurance Adjuster Practice Exam

In insurance terms, what is a reserve?

1. A policyholder's savings account

2. A pool of collected premiums set aside to pay claims

3. The insurer's profit margin

4. A government fund for catastrophic losses

The correct answer is: A pool of collected premiums set aside to pay claims

A reserve in insurance refers to an amount of money that is set aside by an insurance company or an insurer to pay for future claims. This amount is accumulated from the premiums paid by policyholders and is meant to cover potential expenses caused by future claims. This means options A, C, and D are incorrect because they do not accurately describe the purpose of a reserve in insurance. Option A is incorrect because a policyholder's savings account is their personal account, while a reserve is specifically for the use of the insurance company. Option C is incorrect because it refers to the profit margin, which is not related to reserves in any way. Finally, option D is incorrect because a government fund is not the same as an insurer's reserve, which is specific to individual insurance companies.