Estimating and Reserving

This is the process that a company carries out in order to assess the level of funds that are required to meet current and future claim liabilities. It is a KEY indicator if a company is financially solvent.


Claims reserving is important for internal and external and for managing financial performances and assess:

  1. overall financial performance of the company as claims reserve will affect net profit and net worth.
  2. relative profitability of the various classes of business
  3. Adequate premium rates


This is done on a case- by- case basis. Estimates are placed in each file, further split in  relevant sections as:

  1. Accidental Damage (AD), B. Third Party Damage (TPD) c. Third Party Injury (PTI)
  2. Household Claims – estimates placed against the perils: Fire, Theft and Water damage


  1. In order to establish the size of the reserve that is required, a value is placed against each file
  2. An allowance is placed against each for direct claims expenses – Adjusters fees etc.
  3. Reserves are reviewed regularly to ensure they still reflect the likely cost of the claim
  4. Various methods used to calculate the global reserve of a company – outside the scope of the course.
  5. It is vital that, underwriters, actuaries and claims managers are involved in reserving reviews as they know

                the book of business and the details of any unusual characteristics. 


The objective of claims reserving is to estimate the future cost of claims. These will be influenced by:

  1. Incident occurring and the notification of that claim to the insurer
  2. The notification of a claim and the settlement of that claim by the insurer.

Outstanding Claims Reserve:

This is the total of all claims which were notified to the insurer. It covers all the reserves which the claims handler placed in each file.


Incurred but not reported Claims Reserve (IBNR):

These are losses which have already occurred but are yet to be notified to the insurer. Given the insurer is not yet aware, various statistical techniques are used. Such as claims experience, actuarial modeling, legislative changes


Incurred but not enough reported Claims Reserve (IBNER):

 These are losses which have already occurred but are yet to be notified to the insurer and the amount reserved may not be adequate. The reason may be that the insurer does not have enough details to attach a correct sum       


Other reserves:

  1. Equalization – These are required by Law and are meant to smooth the fluctuation in loss ratios for certain classes.
  2. Catastrophe reserve – These are set up to cover claims from a large number of losses from one event. Example (Hurricane)
  3. Unearned premium – this is where a reserve is required for that period of cover where insurance has not been provided
  4. Unexpired risk –  This is only needed where a loss is foreseen in relation to the unearned premium
  5. Provision for claims handling – To cover the anticipated cost in handling direct and indirect expenses in settling claims (fees & expenses)
  6. Reopened Claims – An example is personal injury claim which was settled by the underlying circumstances changes or deteriorates.