What goes into a reserve
Indemnity reserve
- Expected loss amount
- Based on initial scope
- Adjusted as scope develops
Loss adjustment expense
- Adjuster time
- Expert reports (engineering, legal, accounting)
- Investigation costs
Legal reserve
- Expected litigation cost
- Settlement estimates
- Fee shift potential (modified by FL reform)
How initial reserves get set
Actuarial models
- Historical data by claim type, severity, geography
- Average loss for similar profile
- Trended for current market
Adjuster input
- Field observation
- Initial scope assessment
- Judgment adjustments
Carrier guidance
- Target reserve ranges by claim type
- Adequacy testing
- Pattern management
Reserve-adequacy incentives
For adjusters
- Under-reserving = metric penalty when payout exceeds
- Over-reserving = capital inefficiency
- Accuracy is the goal
For carriers
- Aggregated reserves affect financial reporting
- Reinsurance attachment points
- Surplus management
Why reserves affect policyholders
Adjuster authority
- Reserve above adjuster limit → supervisor friction
Settlement posture
- Carrier reluctant to settle over reserve
- Significant reserve increase takes time
Internal scrutiny
- Rising reserves trigger review
- Adjusting reserves mid-claim invites questions
Pace of decisions
- Low-reserve claims move fast
- High-reserve claims get slower
Strategic implications
Early documentation matters
- Setting accurate initial reserve avoids friction
- Documenting full scope up front aligns expectations
Scope additions face resistance
- Not because of the scope itself
- Because of internal reserve-adjustment friction
Representation signals exposure
- PA / attorney involvement raises reserves automatically
- This alone doesn't settle the claim
- But increases internal attention