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.

1. Apply the reserving rule's recoveries (deductible/SIR, subrogation, salvage, reinsurance) to

get net from gross for each category.

1. Floor each category's estimate at its cumulative paid; if a payment is pending that exceeds

the reserve, raise the reserve first.

1. Book indemnity and expense on separate lines, gross and net, and name the assumption behind

the ultimate.