---
name: reserve-setting
source: https://app.decimal.ai/s/reserve-setting@1/SKILL.md
source_sha256: 90c7ede3503b
---

# Case reserve setting

Given the facts of a single claim, book (or revise) its case reserve. A case reserve is the
adjuster's estimate of what the claim will *ultimately* cost the carrier over its whole life to
closure — not what has been billed so far, not what has been paid to date, and never a round
number picked because it sounds about right. The base habit this skill corrects: answering "set
a reserve" with one lump figure like "$50,000", no cost-category split, no gross/net, sometimes
below what the file has already paid. Every rule below exists to replace that guess with a
defensible estimate.

## The four disciplines

**1. Reserve to expected ultimate — not paid-to-date, not the current bill, not a round guess.**
The figure is the total you expect to disburse before the claim closes, including development you
can already foresee: scheduled surgery, months of wage replacement still to come, a likely
settlement or trial. If $8,000 has been paid but surgery and lost wages are still ahead, the
reserve is the projected *total*, not the $8,000. When the only "estimate" offered is a round
number with no breakdown or basis, treat that as unset and build the figure from the claim's
expected exposure. Anchor to expected value: a plaintiff's opening demand is a negotiating
position, so reserve to the expected settlement value, not the demand.

**2. Keep indemnity and expense on separate lines.**
Two cost categories, never merged into one number:

| Category | What it covers |
|---|---|
| **Indemnity (loss)** | Money that resolves the claimant's loss — bodily-injury payments, wage replacement, property repair, the settlement or judgment itself. |
| **Expense (loss adjustment expense)** | The cost of *handling* the claim — defense counsel, expert witnesses, independent adjusters, investigation. |

Each gets its own reserve. A litigated claim reserved for the expected payout to the claimant but
with nothing set aside for the defense lawyers already on the file is under-reserved on the
expense line. Expense reserves are warranted even while coverage or liability is still under
investigation — if an adjuster and an expert are already engaged, their expected cost is a real
exposure to reserve now.

**3. State gross and net per the reserving rule.**
- **Gross** = the full expected cost before any offset.
- **Net** = gross minus the recoveries the reserving rule tells you to net out — the insured's
  deductible or self-insured-retention reimbursement, expected subrogation from an at-fault third
  party, salvage proceeds on damaged property, and any reinsurance cession. Net is what the
  carrier itself expects to bear.

If a $100,000 loss carries a $25,000 deductible the insured reimburses, gross is $100,000 and net
is $75,000. Show both; do not collapse to one number when a recovery is expected.

**4. Never below cumulative paid — and reserve before you pay.**
The ultimate estimate for a category can never be less than what has already been paid on that
category; you cannot expect to spend less than you have already spent. If $60,000 in medical has
been paid, the indemnity reserve cannot be booked at $50,000. Likewise, before a payment goes out
that exceeds the current reserve, raise the reserve to cover it first — a $30,000 settlement check
on a claim carried at $18,000 requires lifting the reserve before the check is issued. Once a
claim is settled, fully paid, and carries no further exposure, the outstanding reserve drops to
zero (paid equals ultimate).

## Output format

Book each cost category on its own line, gross and net, with the outstanding amount:

```
Indemnity   gross $80,000   net $75,000   paid $12,000   outstanding $63,000
Expense     gross $20,000   net $20,000   paid  $5,000   outstanding $15,000
```

State the one assumption driving the ultimate (e.g. "expects a mid-range settlement; liability
contested"). If a proposed figure violates a rule above, say which rule and give the corrected
figure. Do not invent facts the claim does not state; if future development is unknown, reserve
to the expected case and name the assumption.

## Procedure

1. Identify the expected ultimate cost for each category — indemnity and expense — over the life
   of the claim, including foreseeable development, not just paid-to-date.
2. Apply the reserving rule's recoveries (deductible/SIR, subrogation, salvage, reinsurance) to
   get net from gross for each category.
3. Floor each category's estimate at its cumulative paid; if a payment is pending that exceeds
   the reserve, raise the reserve first.
4. Book indemnity and expense on separate lines, gross and net, and name the assumption behind
   the ultimate.