Glossary Spotlight: Case Reserves

Definition: Reserves for losses and allocated loss adjustment expenses (ALAE) for specific claims reported to the insurer.

Case reserves are amounts established by an insurance company to cover the estimated future cost of individual reported claims. These reserves generally include anticipated claim payments and allocated loss adjustment expenses (ALAE), such as legal defense costs and other expenses directly associated with a claim. Case reserves represent estimates of outstanding liabilities rather than amounts already paid and may be adjusted as additional information becomes available.

Case reserves are typically established when a claim is reported and reviewed as the claim develops. Claims adjusters consider factors such as the nature and severity of the loss, available documentation, potential liability, and anticipated settlement costs. For example, a captive insurance company may establish a $200,000 case reserve for an outstanding liability claim based on its initial assessment. If subsequent information indicates that the claim is likely to cost more or less than originally anticipated, the reserve may be increased or reduced accordingly.

For captive insurance companies, case reserves are an important component of claims management and financial reporting. Changes in individual claim estimates affect incurred losses and can influence underwriting results and reported liabilities. This is particularly relevant for captives covering long-tail casualty risks, such as workers compensation, general liability, and medical professional liability, where claims may remain open for several years.

Case reserves differ from incurred but not reported (IBNR) reserves, which account for losses that have occurred but have not yet been reported, as well as additional development not reflected in existing case reserves. Actuaries evaluate both case reserves and IBNR when estimating a captive's ultimate loss liabilities. The adequacy of case reserves can therefore influence actuarial reserve estimates, financial results, and assessments of the captive's ability to meet future claim obligations.

FAQs

How are case reserves established and adjusted in a captive insurance program?

Case reserves are generally established by claims adjusters or claims administrators based on available information about individual reported claims. Estimates may be revised as investigations progress, medical costs become clearer, litigation develops, or settlement expectations change. Captive managers and actuaries may review these estimates as part of ongoing claims and reserve evaluations.

What is the difference between case reserves and IBNR reserves?

Case reserves are established for specific claims already reported to the insurer. IBNR reserves account for additional estimated losses not reflected in those reserves, including claims that have occurred but have not yet been reported and anticipated development beyond current case estimates. Together, they contribute to the insurer's total estimated unpaid loss liabilities.

How do changes in case reserves affect a captive's financial results?

Increasing case reserves generally raises incurred losses and reported liabilities, potentially reducing underwriting income and surplus. Reducing reserves generally has the opposite effect. These changes can affect a captive's financial results even when no additional claim payments have been made.