What is the primary purpose of reserves in an insurance company?

The primary purpose of reserves in an insurance company is to fulfill future obligations to policyholders. Reserves are funds that insurance companies set aside to ensure they can pay out claims and meet their policyholder obligations as they arise. This is a crucial aspect of an insurer's financial stability and regulatory compliance, as it demonstrates the company’s ability to cover expected losses and maintain its commitments to its customers.

When an insurance policy is sold, premiums collected do not immediately need to be paid out, leading to the necessity of setting aside a portion of those funds. This reserving process provides a financial safety net to guarantee that claims will be paid when they occur, maintaining trust in the insurance system.

Other options, while they pertain to aspects of an insurance company's operations, do not serve as the fundamental reason for establishing reserves. For instance, covering operational costs and investing in stocks and bonds are important for financial management but do not directly relate to the primary function of reserves. Additionally, providing bonuses to agents is more of a compensation strategy rather than a critical operational funding necessity related to policyholder obligations.