Art or Science?

Many of us have risen through the ranks of an adjuster despite never intending to be one in the first place. I for one don't regret it. One regret I do have is not fully appreciating the impact of reserving a claim on behalf of a customer as a fledgling adjuster. We all know the bad words and phrases surrounding the practice of reserving such as "stair-stepping" and "11th hour changes" but many adjusters don't appreciate the negative effect these have on a customer's bottom line. 

Small incremental or reactive reserve changes as a practice have a negative impact on a book of claims when they are developed or projected to their ultimate value. Future claims are artificially inflated higher than necessary when the Development Factor derived in an actuarial calculation. There is also the risk that the open claim is not adequately reserved. The gap between projected or developed reserve creates a disruption in a company's cash flow when the now closed claim is reconciled. The result is one of two outcomes; the company has to put aside too much money or not enough. So how can this be prevented?Reserve early and go beyond your comfort zone. 

Yes, you may not have all of the facts or evidence to support an accurate reserve so you must rely more upon experience. Ask yourself:                                                  

- How many claims have I handled that are similar in nature to the one I have now?                                                                    

- Do claims in a certain jurisdiction for this customer get litigated often?        

- What are the opinions of my colleagues or supervisor on the most probable outcome of the claim?

We should always be asking ourselves the question "What is the most probable outcome of this claim?". This encourages us to look ahead and ultimately minimize the frequency and extent of reserve changes. It is better to be a little higher than you are comfortable then to have to explain why you were short. Now, a word of caution. We don't want to get into the practice of reserving beyond "the most probable outcome". That puts us back to artificial inflation of new claims and a "sand bagging" effect as I described earlier. 

If we better understand the impact made at the desk level, reserving becomes an art and in time our experience will make us better at reserving and help our customers succeed at their business.