A claims reserve is an account created by an insurance company to pay for future claims. When a claim is settled, the insurer pays from the claims reserve.
Definition and Example of Claims Reserve
A claims reserve is an account created by the insurance company to pay for future claims. The claims reserve is funded based on forecasts of the amount of money needed to pay for claims that have not yet been settled or reported. In other words, if you have a minor accident and submit a claim against your collision coverage, when the insurer agrees to settle, they will pay you from the claims reserve.
How Claims Reserve Works
To understand how a claims reserve works, it’s important to know what “claim” and “reserve” mean. When you submit an insurance claim, you are requesting a financial settlement from the insurance company for a loss covered by the policy. For example, if a fire destroys your kitchen, you can submit a claim against your homeowner’s insurance.
A reserve is money set aside for a specific purpose. A claims reserve is the money that the insurance company must allocate to pay claims. Therefore, if your insurance company approves your homeowner’s insurance claim after the kitchen fire, they will draw from the claims reserve to pay you.
Service providers also maintain a loss inventory to cover incurred losses and the adjustment expenses related to the losses.
Types of Claims Reserves
Insurance companies use three types of claims reserves:
- Outstanding Claims Reserve (OCR): money allocated to pay unsettled claims which can include reported claims only or all outstanding claims.
- Incurred But Not Enough Reported Claims Reserve (IBNER): funds reserved to cover potential excess claims when more information about open claims is revealed.
- Incurred But Not Reported Claims Reserve (IBNR): money designated for covered losses that have not yet been reported by the insurer.
Acknowledging that claims reserves help insurance companies manage risk and ensure their ability to meet their claims obligations. Technical practitioners determine the amount of funding for the claims reserve by preparing forecasts for future claims. A high reserve can lead to increased insurance premiums, while a low reserve can weaken the insurance company and expose it to the risk of not having sufficient funds to pay claims.
Summary:
- Claims reserves help insurance companies manage risk and ensure their ability to meet their claims obligations.
- Technical practitioners determine the amount of funding for the claims reserve by preparing forecasts for future claims.
- A high reserve can lead to increased insurance premiums, while a low reserve can weaken the insurance company and expose it to the risk of not having sufficient funds to pay claims.
Source: https://www.thebalancemoney.com/what-is-a-claims-reserve-5223861
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