How Does an Insurance Company Set Reserves?

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A reserve amount is set by an insurance company through a prediction of the amount of money that a claim will cost over the course of the payments. Find out how insurance companies set aside reserve money on long-term coverage claims with information from a licensed insurance salesperson in this free video on insurance.

Part of the Video Series: Insurance Facts
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Video Transcript

How does an insurance company set reserves? Now for those of you who might not know what a reserve is, a reserve is the amount of money held back from your policy by an insurance company when there is a claim. Typically it's a liability claim, but sometimes it could be a physical damage claim. So, for example, if I go out in my vehicle and I strike a family of four, and they're all injured and they all need hospital care, the money for that claim that might be paid out over time isn't all going to be paid out right away, because if that family might need care for the next year, they need, you know, surgeries and rehabs, and they need to go to a special treatment center to get physical therapy, the insurance company is going to predict right away what that's going to cost over that long term, and they put a reserve on the claim. Once that reserve's put on the claim, it comes out of my aggregate limit that's left on my policy. So that money is actually taken aside from the beginning and it lowers my amount of coverage from the start. So, a reserve is set by an insurance company by predicting the amount of money that a claim will cost them in the end. So you often see reserves on worker's compensation claims, or reserves on automobile claims, especially if it's been a more serious accident or occurrence.

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