It's our favorite time of month -- Metric Time!!
This month's topic is Loss Reserve. For anyone with clients in the insurance industry, you know this is an important metric, it represents an insurer’s total estimated liabilities towards claims. On Thursday we'll post a follow-up relating to this metric on actuarial accuracy and give you tips on how to use these metrics and KPIs in your conversations with clients, so check back.
Who uses it?
Insurance companies estimate the number and amount of claims they will pay. This estimated value is known as insurer’s loss reserve. The reserve is the amount of money an insurer should have set aside so that it can pay the claims of its policyholders. Property/casualty insurers use different calculations than Life Insurers mostly due to the nature of the risk and the duration of the policy.
How is it measured?
The amount of the reserve depends on the accurate calculation and projection of the number and size of claims that are likely to be filed within a given time period. Calculations take into effect the risk of the policyholder and business, the projection for a large scale catastrophe and the amount of time of the contract, which all impact the frequency and size of potential claims. Because of this, insurance providers are constantly refining the calculation regarding the amount of insurance loss reserve they should maintain.
What’s in it?
For a property and casualty insurer, it would include loss and loss adjustment expenses, which are costs for investigating and adjusting the claims. For health insurance companies, it would include the medical costs expected to be claimed. For life insurance companies it will include policy benefits. For example, for casualty companies, it would include provision for known claims due but not paid, known claims not yet due, and provision for Incurred But Not Reported losses (IBNR) claims.
Why is it important?
Consumers need to know that their insurance company will be able to pay their claims when needed and insurance companies are regulated and rated on their ability to pay future claims. If a company has made excessive loss reserve provisions, this can impact their profitability . Yet, if a company does not make adequate provision of the loss reserve, the company’s solvency is at stake.
What drives it?
Insurers recalculate their loss reserves on a consistent basis. New information, new policyholders, keep managers and actuaries busy.
What's the Goal?
The goal is to have enough of a loss reserve to pay claims as they occur without taking profit from any other part of company.
So how do you translate this into conversation about value with your clients?
See this Thursday’s posting on The KPI Connection.
For a deeper discussion on Financial Metrics, Operational KPIs and how they drive sales, see our previous blog post at www.finlistics.com/blog