Insurance Claim Reserves Examination: Meaning and Significance

In the world of insurance, claims reserves play a vital role in calculating profits for insurers and ensuring financial stability. These reserves are essentially a financial buffer set aside for future payments of unresolved claims.

Claims reserves can be created for two types of claims: Reported but Not Settled (RBNS) and Incurred but Not Reported (IBNR). The amount for a claims reserve is estimated using actuarial techniques and adjusted as claims develop and new information becomes available.

The monetary amount of the claims reserve can be calculated subjectively or statistically, using past data to project future losses. This reserve is funded from premiums paid by policyholders, making it a shared responsibility between the insurer and the policyholder.

Regular review and adjustment of claims reserves are essential for effective management and better financial outcomes for both insurers and policyholders. Accurate calculation of claims reserves is crucial for maintaining financial stability and investor trust.

Underestimating claims reserves can have significant consequences. It can negatively impact investor trust and company share prices, potentially leading to financial instability. On the other hand, overestimating reserves can tie up capital that could be used for other purposes.

An outstanding claims reserve is an accounting provision, recorded as a liability on a company's balance sheet. For instance, when a home insurance provider like Company A expects a large number of claims from a natural disaster, even if they have not been reported yet, they create a claims reserve.

IBNR claims, especially, are challenging to assess due to their uncertain nature. However, insurance companies strive to accurately determine the amount needed for claims reserves to ensure they are prepared for any potential future payouts.

In Germany, some of the most significant insurance companies building claims reserves include large primary insurers such as AXA, which manages insurance and provision services for around 8 million customers, indicating its significant role in claims reserve building.

In conclusion, claims reserves are a crucial aspect of the insurance industry. They serve as a safeguard for both insurers and policyholders, ensuring financial stability and investor trust. Regular review and accurate estimation of claims reserves are key to maintaining this balance.