Loss lessons in commercial trucking | Claim reserving basics

A Typical Scenario

You get a call from your driver stating he was in an accident. You promptly report the claim to your insurance carrier, and claims are set up with reserves of $1,600 under auto liability and $10,000 under physical damage/collision. Your initial thought is to wonder why the insurance carrier chose those reserve amounts since you only just reported the claim and the adjuster’s investigation hasn’t even started.

What is a Reserve?

Simply stated, a reserve is an amount of money the insurance carrier sets aside in anticipation of making a payment(s) on a claim. To put it another context, if you want to go to the store and buy groceries, you first make sure you have enough money in your bank account to cover the cost of those groceries.

Approaches to Reserving

Each insurance carrier in the marketplace has their own approach to how they instruct claim adjusters to reserve a claim. It is a good idea to ask about this before you purchase insurance so there are no surprises or questions down the road. The two main approaches to reserving are:

1. Actual Loss Estimates – In this approach, through the process of the claim investigation the adjuster attempts to determine (or estimate) what the likely amount of loss will be based on percentage of fault and damage amount, and then sets the corresponding reserve at that amount. This approach generally results in periodic changes (up or down) to the reserve amount during the course of the claim investigation, but is arguably the most accurate approach.
   
   
2. Worst Case Scenario – In this approach, the adjuster attempts to determine soon after receiving the claim what the maximum amount of exposure is (the most that might have to be paid out) based on adverse facts, similar claims, legal verdicts in that jurisdiction, etc. and sets the reserve at that amount. This approach results in very few changes to the reserve amount, and many times the eventual amount paid on the claim is significantly less than the reserve amount. However, some insurance carriers prefer this approach to ensure that the reserve level is always adequate in relation to how much money is going out the door, and calculation of insurance premiums.

A Few Types of Reserves

• Initial Reserve – An amount the insurance carrier initially assigns to the claim file based on the facts/description in initial loss notice.
  
  
• Signal Reserve – A predetermined, set amount the insurance carrier assigns to the claim file (either at the outset or after some investigation) to signal a likely outcome and/or potential coverage issue. For example, if the facts strongly indicate that the other party in an accident was at fault, the auto liability adjuster will likely set a signal reserve (such as $1,600).
  
  
• Policy Limit Reserve – After review of the facts and the policy, the adjuster may determine that the claim is covered, but can only be paid up to a certain amount, for example $10,000.   

Final Thought

If you have questions about a reserve assigned to your claim, ask the assigned adjuster to explain the rationale behind the reserve. In most cases they will discuss this in detail with you. In addition, please don’t hesitate to reach out to your Marsh McLennan representative with any questions on claim-related items.

This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change.