What is one potential consequence of underreserving for an insurer?

Underreserving refers to the practice of an insurer not setting aside enough funds to cover the expected claims that may arise from the policies they have issued. When an insurer underreserves, it significantly undermines its financial health because it may lead to a situation where there are insufficient funds available to pay for all claims. As claims are made and the insurer finds itself unable to pay them in full, this results in financial strain.

Consequently, the insurer's reputation may be damaged as policyholders may lose trust in its ability to meet its obligations. Additionally, this financial strain can lead to regulatory scrutiny and potential penalties for not maintaining adequate reserves in alignment with industry standards. All these factors culminate in an overall deterioration of the insurer's financial health, which can have far-reaching consequences for its long-term viability and stability in the market.