Reserving
Reserving is the process of setting aside estimated funds to pay for claims that have already occurred but are not yet fully paid, including claims incurred but not yet reported (IBNR).
When an insurer or reinsurer earns premium, it must estimate the losses tied to that business and record a liability, called a loss reserve, on its balance sheet. The NAIC defines a loss reserve as the amount insurers set aside to cover claims incurred but not yet paid. Reserves include claims already reported and an estimate for claims that have been incurred but not yet reported, known as IBNR.
Reserving sits at the center of solvency. If reserves are set too low, a company can appear more profitable than it is and may struggle to pay claims later. If they are set too high, capital that could support new business is tied up. Actuaries revisit reserve estimates regularly as claims develop and more information arrives.
For example, if a liability claim is filed today but may take years to settle, the insurer books a reserve now for its best estimate of the eventual payout, then adjusts that figure over time as the claim matures.
Related Terms
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.