Outstanding claims reserves
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Outstanding claims reserves in general insurance are a type of technical reserve or accounting provision in the financial statements of an insurer. They seek to quantify the outstanding liability for insurance claims which have been reported and not yet settled. They may or may not include IBNR (Incurred But Not Reported) reserves. This is a technical reserve of an insurance company, and is established to provide for the future liability for claims which have occurred but which have not yet been reported to the insurance company. (Benjamin, p237)
[edit] Background
An insurance policy provides, in return for the payment of a premium, acceptance of the liability to make a payment to the insured person on the occurrence of one or more specified events over a specific time period. The occurrence of the specified events and the amount of the payment are both usually modelled as random variables. There may be a delay in the insurer's settlement of the claim, especially where litigation is involved.
When a claim is notified, the ultimate liability is unknown and must be estimated and provided for by way of reserves or accounting provisions. Similarly, claims may arise which have not been reported at the accounting date, and the liability for such claims needs to be estimated. Each time the insurance company's accounts are prepared, the profit declared is only an estimate until all claims have been settled. The process of valuation of technical reserves should ensure that profits from apparently low claim rates are not taken prematurely. (Benjamin, p 235)
[edit] Method of estimation
Various statistical methods have been established for the calculation of outstanding claims reserves in general insurance. These include:
- The chain ladder method
- The separation method
- Average cost per claim methods
(Benjamin, p244-251)
A non-statistical method of assessment known as "case assessment" also exists. Under this method, claims assessors use their expert knowledge of insurance settlements to estimate the amount that is likely to be payable under a particular claim. Such methods are not suitable for types of insurance where the monetary amounts are small, and are not suitable for forming estimates of IBNR reserves. (citation needed)
Methods may allow for discounting to allow for the fact that investment returns may be earned on the assets of the insurance company backing the liabilities. They may also include an inflation projection to allow for the fact that claims may increase over time due to the effects of inflation. (citation needed)
[edit] References
- Benjamin, B., General Insurance, Heinemann, 1987, London.
