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.