Background
An insurance policy provides, in return for the payment of a premium, acceptance of the liability to make payments to the insured person on the occurrence of one or more specified events (insurance claims) over a specific time period. The occurrence of the specified events and the amount of the payment are both usually modelled as random variables. In general, there is a delay in the insurer's settlement of the claim, typical reasons are (i) reporting delay (time gap between claims occurrence and claims reporting at the insurance company); (ii) settlement delay because it usually takes time to evaluate the whole size of the claim. The time difference between claims occurrence and claims closing (final settlement) can take days (e.g. in property insurance) but it can also take years (typically in liability insurance).
Claims reserving now means, that the insurance company puts sufficient provisions from the premium payments aside, so that it is able to settle all the claims that are caused by these insurance contracts. This is different from social insurance where one typically has a pay-as-you-go system which means that premium payments are not matched to the contracts that cause the claims, see Wüthrich-Merz (2008), Section 1.1.Claim payments are generally normally distributed ~N(0,1)
Read more about this topic: Outstanding Claims Reserves
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