What a reserve is
A reserve is an accounting entry representing the carrier's best current estimate of the eventual claim cost. Reserves are set at FNOL and adjusted through the life of the claim.
Typical components:
- Indemnity reserve (the actual loss amount)
- Expense reserve (adjuster time, engineer reports, attorney fees)
- Loss adjustment expense (internal handling costs)
How reserves get set
Initial reserves are set using:
- Claim type (water, wind, fire, liability)
- Severity classification (small / medium / large / catastrophic)
- Policy limits
- Historical claim data for similar losses
- Adjuster's first-look scope estimate
Carriers use reserve adequacy as a performance metric: reserves that later prove too low reflect poorly on the handling adjuster.
Why reserves matter to policyholders
- Adjuster authority. Adjusters have dollar-amount limits. A claim reserved at $35K might sit with a field adjuster with $25K authority: every payment requires supervisor sign-off.
- Review pressure. Low reserves that get adjusted upward trigger internal reviews. Adjusters are incentivized to set reserves they can defend without escalating.
- Settlement posture. Carriers don't like to settle over reserve. A documented scope that dramatically exceeds the reserve often triggers reserve increases rather than immediate settlement.
- Reinsurance triggers. Large reserves may trigger reinsurance notice, adding carrier-internal friction and review.
How reserves get adjusted
- Additional damage discovered
- Scope corrections on re-inspection
- Expert reports adding to indemnity exposure
- Represented-party involvement (PA or attorney)
- Mediation/appraisal cost additions
How this shapes policyholder strategy
- Document thoroughly at first inspection. A well-documented initial scope sets an accurate reserve from day one: making later negotiations easier.
- Expect friction when the reserve must go up. If your documented scope is materially above the initial reserve, expect internal review and delay, not immediate agreement.
- Don't assume low offer = bad faith. The offer often reflects the reserve the adjuster can authorize without escalation.
- Escalate to create reserve movement. CRN, mediation, and appraisal filings trigger internal reserve review: often producing upward adjustment.
What payouts are
Actual payout is the amount the carrier agrees to pay. Components:
- Indemnity payment: the loss amount minus deductible
- RCV holdback: depreciation held until repairs complete
- ALE payment: separate tracking, paid over period of restoration
- Supplemental payments: added scope paid over time