Claim Reserve
AdvancedA claim reserve is the amount of money an insurer sets aside to pay claims that have occurred but have not yet been fully settled, including claims that have been reported and those not yet reported.
Insurance claims are often paid long after the event that caused them. Settling claims, especially for injuries or liability, can take years. Insurers must estimate how much they will eventually pay and record this as a liability.
Claim reserves typically include reported claims not yet settled, estimated from information about each case; incurred but not reported claims, for events that have happened but have not yet been reported; and the costs of handling and settling claims.
For example, after a major storm, an insurer might set aside 50,000,000 for claims already reported and a further 15,000,000 for claims it expects policyholders to report in the coming months.
Claim reserves are usually the largest liability on a general insurer's balance sheet. Estimating them requires actuarial judgment, using past patterns of claims. If reserves prove too low, the insurer must strengthen them, reducing profits; if they prove too high, the release boosts profits. Regulators and auditors examine reserves closely.
For worked examples and full lessons, visit notesbysara.org.