Field Guide definition

Claim reserving

Claim reserving is the process of estimating what an insurer will pay on a claim, including loss and defense expense, and recording that estimate as a reserve. Adjusters set a case reserve when a claim opens and update it as the facts change.

What is claim reserving?

A reserve is the amount an insurer sets aside to pay a claim that has been incurred but not yet paid. The NAIC's glossary describes loss reserves as an estimate of liability in an insurer's financial statement. Claim reserving is the work of producing that estimate for each claim and keeping it current.

What goes into a claim reserve?

  • Indemnity: the expected payment to the claimant or the insured
  • Loss adjustment expense (LAE), which includes defense counsel and expert fees; the NAIC splits LAE into defense and cost containment and adjusting and other
  • A view on expected recoveries such as subrogation or salvage, treated as the carrier's guidelines direct

What is the difference between case reserves and IBNR?

A case reserve is set by the adjuster for one reported claim. IBNR reserves cover losses that have occurred but have not been reported yet, and actuaries estimate them across the portfolio. The NAIC glossary's definition of loss reserves covers reported claims that are still unpaid and losses that have occurred but have not been reported.

When should a reserve change?

When the exposure changes. New medical information, a demand, a lawsuit, an expert report, or a coverage development can each move the estimate. The first reserve is set once the adjuster has enough facts, and the carrier's guidelines set the standard and the review intervals.

What happens when reserves are wrong?

Settlement and authority decisions rest on the wrong number. A reserve that trails the exposure produces surprise development later, and the claims data that pricing and underwriting teams read is off. Reserving accuracy is a standard item in a claims quality review, and a stale reserve is one source of claims leakage.

Ely Audit checks reserving accuracy across open and closed files as one of its audit use cases.

FAQ

  • What is a case reserve?

    A case reserve is the adjuster's estimate of the total cost of one reported claim, including expense. It is set when the claim opens and revised as new information arrives.

  • How often should a claim reserve be updated?

    Whenever the exposure changes, and at the review intervals in the carrier's guidelines. Waiting for a diary date while a demand or a lawsuit sits in the file is a common reason reserves lag.

  • Is a claim reserve the same as a payment?

    No. A reserve is an estimate of what will be paid. Payments are recorded as they are made. The final payment can be lower or higher than the reserve.

Related definitions

  • Claims leakage

    Claims leakage is money lost on covered claims through handling failures: the gap between what an insurer pays, including loss adjustment expense (LAE), and what it would have paid if each claim had been handled to its own guidelines.

  • Claims quality review

    A claims quality review, also called claims QA or claims quality assurance, is an internal check of claim files against best practices and the organization's own handling guidelines. Reviewers score each file on coverage, contact, investigation, reserving, documentation, payment, and closure.

  • Insurance claims lifecycle

    The claims lifecycle is the path a claim follows from first notice of loss to closure: intake, coverage review, investigation, evaluation and reserving, settlement, payment, and closure. Recovery can follow payment, and a closed claim can reopen if new information arrives.

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