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  #1  
Old 06-25-2014, 08:34 PM
777888 777888 is offline
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Question Loss reserve, claims reserve & policy reserve?

What are the differences between the following?
(i) loss reserve
(ii) claims reserve
(iii) benefit reserve
(iv) policy reserve

Are they all the same thing?

Thanks!
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  #2  
Old 06-25-2014, 09:16 PM
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Gandalf Gandalf is offline
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I'm going to keep this very high level and hope I have the sense not to say more later.

Policy reserve is the reserve where the insured event has not taken place. Loss reserves and claim reserves and pretty much the same thing: the insured event has taken place but the benefits have not been paid. (There is usually a suggestion that the eventual benefits to be paid are not known with certainty.)

E.g. someone buys a health insurance policy that pays benefits if the person is hospitalized. From day 1, you have a policy reserve because the person may become hospitalized.

Suppose at the end of one month, the person is hospitalized. The insurer's expected claims have gone up dramatically, now that it has become certain that some payments will be made (same would be true even if there were a deductible so that perhaps nothing would be paid: expected costs are still much higher than when the person might not even become hospitalized). The reserve for those future benefits, since a claim has occurred, is a claims reserve or a loss reserve. (Loss reserve is used more often in property and casualty insurance.) Usually claims reserves are just for the actuarial present value of future claims payments associated with the known claim, with no reduction for present value of future premiums. The idea (not rigorous) is that future premiums are still needed to cover the possibility of a second insured event. Often claims reserves and loss reserves are not discounted with interest; one rationale (not rigorous) for no interest is that the claims payments will usually be made fairly soon, so the interest element of the calculation would not be significant.

Benefit reserve is an MLC term for a policy reserve calculated a specific way. All benefit reserves would be policy reserves; not all policy reserves would be benefit reserves.
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Old 06-26-2014, 08:22 AM
Steve Grondin Steve Grondin is offline
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Another simple distinction:

Benefit reserve is also used as a US GAAP term. It is the reserve based on the benefits of the contract, as opposed to an expense reserve, which takes into account the expenses of the company.
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Old 06-29-2014, 03:36 PM
777888 777888 is offline
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Thanks for the clarifications!

Quote:
Usually claims reserves are just for the actuarial present value of future claims payments associated with the known claim, with no reduction for present value of future premiums. The idea (not rigorous) is that future premiums are still needed to cover the possibility of a second insured event.
But I still don't get the idea of a 'claims reserve'.
Isn't reserve always defined to be APV(future benefits + expenses) - APV(future premiums)?
Why are all future premiums omitted in the claims reserve? What does a second insured event mean?
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Old 06-29-2014, 04:45 PM
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Not a perfect example, but captures the distinction.

I buy 12 months of comprehensive insurance for my car. I pay a premium of $X per month. Claims are rare, but can be expensive.

At the end of month 1, the insurer has a policy reserve for expected claims of the next 11 months - expected premiums of the next 11 months.

Day 2 of month 2, we have a hail storm. It does a lot of damage to my car. Insurer estimates it will pay $1000 to fix the car. That $1000 is a claims reserve.

My car is still insured for the rest of the year. So the insurer still has a policy reserve for the expected costs for future claims (not including the hail that already happened) less the expected future premiums. There could be another hail storm, or various other events that would trigger additional claims.

It can't use the future premiums in both the policy reserve and the claims reserve, and standard practice is to use them in the policy reserve.

There are flaws in the example but the basics are right:
Claims reserve - for events that have already happened; ignore future premiums
Policy reserve - for future events; consider future premiums
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Old 06-30-2014, 03:32 PM
777888 777888 is offline
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I see.

So when an insured event has taken place, the 'claims reserve' is just equal to the expected value of the eventual claims due to this insured event? Is this estimated after an insured event has taken place?

Last edited by 777888; 06-30-2014 at 03:47 PM..
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Old 06-30-2014, 03:53 PM
CuriousGeorge CuriousGeorge is offline
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Quote:
Originally Posted by 777888 View Post
Isn't reserve always defined to be APV(future benefits + expenses) - APV(future premiums)?
This is the definition of a policy reserve or benefit reserve. It is forward-looking, and is calculated for policies where the policyholder is still [alive] at time X.

The simplest example is level term insurance: the risk of death increases every year, as the policyholder gets older, but you are charging a flat premium. So you have to "save up" some of the early premium to pay for the higher number of deaths later on.

Claim reserves are backward looking. They are specific dollars set up to pay claims for events that have already happened before time X, whether the insurance company knows about them or not.

----
Policy reserve: book $1000 reserve for each living policyholder, in case some of them die.
Claim reserve: John's wife called and said he died yesterday. We need to start the paperwork to pay her a $500,000 life insurance benefit.
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Old 06-30-2014, 03:56 PM
CuriousGeorge CuriousGeorge is offline
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Quote:
Originally Posted by 777888 View Post
I see.

So when an insured event has taken place, the 'claims reserve' is just equal to the expected value of the eventual claims due to this insured event? Is this estimated after an insured event has taken place?
Yes and yes. Though you may not know the insured event has happened, which makes estimating it more tricky.

But for life insurance, the split is often on the order of 99% policy reserve / 1% claim reserve, so some companies just set up a reasonable ballpark claim reserve, and do periodic testing of its adequacy.
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Old 06-30-2014, 06:26 PM
777888 777888 is offline
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Thanks everyone for the clarifications! But I have some more questions:

Are IBNR claims considered to be a 'claim reserve' or a 'policy reserve'?

Also, do we add up the policy reserves and claim reserves to get the total reserves? Wouldn't there be some overlap because the policy reserves already included the possibility of claims?
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Old 06-30-2014, 06:49 PM
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No theoretical overlap: policy reserves for claims occurring in the future. Claims reserves for claims which have already happened.

Neither is a perfect calculation, but they are done reasonably accurately.

It should be easy to decide if IBNR is a claim reserve or a policy reserve. If the claim has occurred, the reserve is a claim reserve. Is IBNR held for claims which have occurred or for claims which have not yet occurred?
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