What is a 'Claims Reserve'

A claims reserve is the money that is earmarked for the eventual claim payment. The claims reserve funds are set aside for the future payment of incurred claims that have not been settled and, thus, represent a balance sheet liability.

The claims reserve is also known as the balance sheet reserve.

BREAKING DOWN 'Claims Reserve'

In return for a premium, an insurance company accepts any liability in the event that an adverse occurrence takes place which damages the property of its insured. Accepting liability means making a payment to the insured person who files a claim following loss of property or reduced quality of health. Every year, insurance companies deal with claims that are filed against the policies that they sell. For example, an auto insurance policyholder who gets involved in an accident will file a claim with his insurance provider to reimburse him for any damages made to his car. Many claims are complex and can take days or even years to settle. Some claims, like property losses due to fire, are easily estimated and quickly settled. But others, such as product liability, may be settled long after the policy has expired. Therefore, when a claim is made, an insurance company will assign a claims reserve to each file reported, reflecting its best estimate of the eventual settlement amount.

A claims reserve is money set aside for a claim that has been reported but not settled (RBNS). The money is taken from a portion of the premium payments made by policyholders over the course of their insurance contracts. After a claim is filed, a claims adjuster is assigned to the case and is responsible for estimating the payable amount upon settlement. The outstanding claims reserve is an actuarial estimate, as the amounts liable on any given claim is not known until settlement. The monetary amount of the claims reserve can be calculated subjectively, using the claims handler's judgment, or statistically, by evaluating past data on losses to project future losses. The claims reserve is adjusted over time as each case develops and new information is retrieved during the claims settlement process. The total amount of funds set aside for a claim is the sum of the expected settlement amount and any expenses incurred by the insurer during the settlement process, such as fees for claims adjusters, investigators and legal assistance.

Claims reserves are future obligations of an insurance company. They are classified as liabilities on the insurance company's accounting statements since they must be settled at a future date. In other words, they are potential financial obligations to policyholders. The outstanding claims reserve is the accounting provision made in the balance sheet of an insurance company for all insurance claims that have been reported but not yet settled or which have been incurred but not reported (IBNR). IBNR is difficult to assess, however. For example, workers may inhale asbestos while performing their jobs but may not file a claim until after being diagnosed with an illness 20 years after the adverse event occurred. Actuarial estimates of the amounts that will be paid on outstanding claims must be evaluated so that the insurer can calculate its profits.

RELATED TERMS
  1. Insurance Claim

    An insurance claim is a request for compensation for a covered ...
  2. Calendar Year Accounting Incurred ...

    Calendar year accounting incurred losses is a term used in the ...
  3. Reported But Not Settled (RBNS)

    Reported but not settled losses have been reported to an insurance ...
  4. Allocated Loss Adjustment Expenses ...

    Allocated loss adjustment expenses (ALAE) are part of an insurer’s ...
  5. Buyout Settlement Clause

    A buyout settlement clause is an insurance contract provision ...
  6. Loss Development

    Loss development is the difference between the final losses recorded ...
Related Articles
  1. Trading

    Trading With The Jobless Claims Report

    Introduction to the jobless claims report. This article looks at what jobless claims tell us about the economy's health and how to interpret the data contained in the release.
  2. Insurance

    What To Do When Your Insurance Company Won't Pay

    Struggling to get a claim honoured? Find out what you can do.
  3. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  4. Insurance

    An Advisor's Guide to Prof. Liability Insurance

    A guide to what financial advisors need to know about professional liability insurance.
  5. Insurance

    Insurance, Excess Insurance, and Reinsurance

    Understanding the differences between insurance, excess insurance, and reinsurance might help you avoid being overinsured or underinsured.
  6. Managing Wealth

    Lawyers Concerned About Buffett Deal With AIG

    The broader implications of the risk transfer deal on the insurance industry in the United States are unclear.
  7. Financial Advisor

    Mutual vs. Stock Insurance Companies

    Learn about the differences between stock and mutual insurance companies and which is best for you as a policyholder.
  8. Insurance

    How to Find the Right Car Insurance

    Finding the right car insurance can be difficult. However with these strategies, you can get the most for your money, protect your assets and your health.
RELATED FAQS
  1. Can an Insurance Company Deny Coverage?

    Insurance isn't always as straightforward as other products, and insurers can deny coverage in many different instances. ... Read Answer >>
  2. How To Choose an Insurance Company?

    Knowing how to choose an insurance company is not an easy task, there are several factors you should consider, learn to make ... Read Answer >>
  3. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
Trading Center