Secrets of Insurance: Reserving
The claims reserve management function is probably one of the most important aspects of the claim adjuster's responsibility. Establishing adequate claim reserves as part of the claims process is critical to the financial stability of the insurance company.
What is a claim reserve? When a claim is made, the claim adjuster assesses the claim's value in terms of liability and damages and sets aside money to pay for it -- a budget of sorts. A claim reserve is established at first notice of loss (generally an algorithm dollar amount) but is then adjusted up or down as the investigation and adjustment process develops and new information is received.
Why is it critical to the financial stability of the insurance company? Insurance companies rely on claim reserves to set aside funds to pay claims now and in the future (as required by law). If the funds are inadequate to pay the claim, the company may need to use part of its profits or surplus to pay an individual claim as well as future claims.
Without diving into the deep end with a discussion of premium to surplus ratio and so on, inadequate reserving over thousands of claims can even lead to the bankruptcy of an insurance company. Reserving is so critical, yet it is probably the one area in which claim adjusters receive the least amount of training and development.
The reserving of bodily injury (BI) claims is not a science. Values may differ considerably by a myriad of factors, including the type of injury and treatment; the claimant's pre-existing health and prior illnesses or injuries; the degree of disability and permanency; the geographic location; venues and jurisdictions; socioeconomic conditions; and the type of risk insured.
To arrive at the reserve and settlement values for BI claims, adjusters will research jury verdicts, consult defense counsel, and rely on their own experience with similar prior claims as well as industry custom and practice.
IRMI gives the following example: a claimant's attorney is asking for $150,000 for a fractured ankle requiring surgery. The adjuster's last five fractured ankle cases during the past year with similar claim factors were settled at $85,000 to $100,000, and he feels the settlement demand is excessive and the value should be in the lower range. Who is correct, the attorney or claim adjuster?
According to IRMI, it depends. Adjusters become so accustomed to settlement ranges for various injuries, either through supervisor, defense counsel, co-worker input, or their own opinion, that they neglect to fully evaluate each BI claim on its own merits, avoiding any type of pattern or custom. This is how claims end up in litigation.
When negotiating with an insurance company, either on your own or through your attorney, always be mindful of the reserve. Asking for more than the claim adjuster is willing to pay is a clear indicator that your settlement demand is above the reserve amount. So come armed with facts, documents, and arguments that will move the reserve in your direction.
If your injury is permanent, back that up with a letter or records from your doctor; be armed with photographs and witness statements; know the community in which your case will be filed and whether it has a reputation for larger verdicts; be persistent in advocating for yourself; and if all else fails, hire a lawyer to take up the fight for you.