Loss Reserve

This formula estimates the amount that still needs to be held for claims that have already happened but have not yet been fully settled. It works because the reserve is the gap between the insurer’s best estimate of the final total claim cost and the amount already paid out; what remains unpaid is the liability still on the books. In practice, that remaining amount may include both case reserves on reported claims and allowances for claims that have occurred but are not yet reported.

Use this when valuing outstanding insurance liabilities at a point in time, especially in reserving for property, casualty, and liability lines. It is also useful in financial reporting and solvency analysis when comparing expected ultimate losses with current cumulative payments.

• Subtracting reported claims instead of paid claims when the formula is specifically based on payments made so far
• Using an ultimate estimate that has not been adjusted for claim handling expenses if those are meant to be included in the reserve basis
• Forgetting that a negative result indicates the estimate is too low or the claim portfolio is overpaid, not a normal reserve amount