Large Loss Reserving

By: Jerry Provencher
Reserving is risky business. Adjusters hardly ever get credit for a tightly estimated reserve, but nobody escapes the hairy eyeball for a reserve increase. The surest road to loss of client confidence is through stair stepping of reserves. That said, even the largest or most complicated loss can be fairly reserved with a systematic approach.
A systematic approach to establishing reserves, spiced with a healthy suspicion in the extent of damage builds reputation and client confidence.  Airline pilots, surgical teams and engineers utilize lists to ensure comprehensive analysis in their fields; an adjuster using the same method to calculate reserves will have better reserve accuracy. I say we should be calculating, rather than ball-parking, because a reserve is as much a calculation as an estimate.
Knowing the coverage is critical. Endorsements provide all manner of additional coverages or expansions.  Increased limits, Law or Ordinance, Newly Acquired Property and Time/Power Element coverage expansions are commonplace. Edition dates can be significant: The Building and Personal Property Coverage Form edition 10/00 provides up to an additional $10,000 for debris removal, the 10/12 edition $25,000.
A systematic approach is based upon categories of exposure, either by coverage or damage; Emergency expenses, remediation, general conditions and demolition & cartage are all separate estimates. Construction division categories are components of a reserve: Roofing, electrical, plumbing, masonry, doors/windows, interior finishes are all examples of the individual calculation that adds up to the whole.  Each may have subcategories; Interior finishes include flooring, drywall and decorating. Each category can be estimated by square foot, cubic foot or experienced judgment, depending upon the loss. The key is to reduce each exposure to its smallest component, and not omit any category of cost.
Finally, foolish is the adjuster who does not include a healthy allowance for the unknown; reducing reserves is easy; increasing reserves often means the person who assigned you the loss has to go explain your reserve increase to the boss.
HERE is an example of a quick reserve in the field. Provencher & Company adjusters may log into the secured adjuster portal on our website for a more detailed, systematic explanation and more examples.
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As CEO/ Executive General Adjuster Jerry has handled multi-million dollar losses across the country and oversees the Business Interruption Unit. He has testified as an expert witness in business interruption and has represented major insurers as claims handling expert in both bad-faith litigation and the Justice Department’s investigation into catastrophe claims handling following the Northridge Earthquake.
Jerry has more than 30 years experience in property claims, including 16 years with insurance company claims management and Home-Office Technical staff. As AVP of a major insurer, he managed the general adjuster, fire investigation and catastrophe programs.
Jerry is a frequent speaker and instructor with numerous organizations and his articles on technical claim issues have been published by such organizations as American Bar Association, Claims Magazine, PLRB, International Association of Arson Investigators, Bureau of Alcohol, Tobacco & Firearms and the IICRC S520 Mold Remediation Standards.
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