A claims reserve is an insurer estimate for expected payment on reported and incurred-but-not-reported claims.
Core components
Loss reserve typically includes:
- case reserves for specific open claims,
- incurred-but-not-reported estimates,
- adjustment factors for legal and claim handling cost.
Why it drives underwriting
Loss reserve trends indicate portfolio severity and frequency. Large adverse reserve developments can trigger premium increases, stricter underwriting, and stricter risk acceptance rules.
Regulatory perspective
Regulators and auditors expect reserves to be supportable, documented, and updated as new evidence emerges. Weak reserving assumptions can lead to solvency issues and corrective capital actions.
Scenario
An insurer initially reserves $120,000 for a bodily injury claim based on early estimates. New medical records later increase expected settlement to $180,000. The reserve is strengthened to match new facts before quarter-end reporting.