Reserving, the process

Global Reserve:

  Global reserving is mainly the responsibility of the actuarial department of the insurance company. It is also called 

   Actuarial Reserving where it looks at the overall reserving process and the impact on the whole business.

 Claims Reserving Process involves:

                                                                 checking data integrity / checking historical data  / projection of claims

 1. Checking Integrity of Data

           The insurance company must ensure individual case estimates are accurate, no backlogs and all estimates are

            correctly coded according to the type of business as well as the type of loss.

 2. Collating Historical Data

           The data must then be collated into similar groups. Example – Motor can be Private or Commercial, and can further be divided into

           own damage and third party. The grouping must have sufficient data to maintain statistical credibility.  Finally, the historical data

           should show: 

             i.  premiums earned

             ii. number of claims, 

             iii. the amounts paid and outstanding

             iv.  by underwriting year 

             v.   calendar year

             vi.  policy year 

             vii. accident year

3.Project of claims

      The claims then need to be projected to establish the likely ultimate gross payout. One such method is the Loss Development    

      Factor Method

a. Setting out the data in the form of a table showing the development of the premium, claims, incurred claims  (paid

  and outstanding) at each point in time. This data can be analyzed and compared by accident , underwriting, policy

  year (this is called triangulation).

 b. Analyzing the trend

 c. Calculation of the claims reserve

 d. Various averaging techniques are then used to determine development factors for all underwriting years combined

 e. The claims reserved for each accident year is then calculated by multiplying the cumulative claims to date for that

      year by the development factors for the number of years which remains undeveloped.

  f.  A detailed analysis of this method in beyond the scope of this course.

Individual case Reserves:      

A claims handler has an important role to ensure for each case, the reserves are adequate (this does affect the global

    reserve). Different companies, have different strategies but it is important to know what these are (found internally).

Reserves are required for ALL aspects of the claims including:

       a. damage to property (either own or third party)

       b. damage for personal injury (general damages)

       c.  third party special damages

       d. legal cost (claimant and defence)   

 e. information provided by surveyors, adjusters, or engineers can assist in setting the correct reserve, eg. costings etc.

 f.  it is also important to consider policy or third-party liability issues when setting a reserve (split level payments).

 g. reserves should be regularly review to ensure they remain adequate, reduced when payments made or increased if

     extra information comes to light, or the claim becomes more complexed. E.g.: case heading to court, increased fees.

 h. reserves are usually entered onto the system, broken down according to policy cover or section.

An alternative method of individual case reserving employed by some companies is factor or flag reserving. This is

     where a factor is added to each claim rather than to a whole case reserve. Common in motor insurance or small

     personal injury claims and is used to identify certain cases for trend analysis by actuaries. 

     Finally, a Standard or Factor reserve of say £1,000 would be added to every claim of a certain type (motor A.D.)