Loss reserving
Loss reserving is the process of setting aside money to pay for insurance claims that have already happened but haven’t been paid yet. This includes claims that have been reported but aren’t settled (RBNS) and claims that have occurred but haven’t been reported yet (IBNR).
Why reserves are needed: Most general insurance contracts last about a year and pay a single premium. Because claims can come later or be reported later, insurers must estimate how much money will be needed to cover future claims. Reserves are an accounting provision on the insurer’s financial statements to ensure there is enough money to settle all claims that have occurred.
How reserves are calculated: Reserves are forecast based on past losses. The main methods for short-term general and health insurance include:
- Chain-ladder (development) method: uses patterns of how claim payments develop over time to predict future payments, assuming past experience continues.
- Bornhuetter–Ferguson method: combines past loss development with an independently derived estimate of total expected losses.
- Frequency-severity approach: used when data is sparse, modeling how often claims occur and how large they are.
These methods evolved from simple calculations to more formal statistical (stochastic) models that quantify uncertainty. The distribution-free chain ladder is a popular stochastic approach that helps measure prediction uncertainty in reserves.
Why it matters: Reserves ensure a company can pay future claims and are an important part of financial reporting. Delays in reporting or settling claims (which can take years for some lines of business) make reserving essential. This differs from pay-as-you-go social insurance, where current premiums fund current benefits.
Regulatory perspective: Modern standards (such as Solvency II) look at both total reserves and the uncertainty around them, sometimes focusing on one-year risk through measures like the claims development result (CDR).
This page was last edited on 2 February 2026, at 14:00 (CET).