Los Angeles Claims Adjuster Property and Causality Practice Exam

What happens if there is routine under-reserving of a claim?

1. The insurer may overpay claims

2. The insurer faces financial jeopardy

3. The claims process is expedited

4. There is no impact on the insurer

The correct answer is: The insurer faces financial jeopardy

When there is routine under-reserving of claims, it means that the insurer is not setting aside enough money in reserves to adequately cover future claim payouts. This practice can lead to significant financial jeopardy for the insurer. Under-reserving can cause the insurer to be unprepared for the actual costs associated with claims, as the reserves are intended to protect against anticipated losses. If these reserves are insufficient, the insurer may find itself facing liquidity challenges or even insolvency, especially if a large number of claims suddenly materialize or if the claims are more costly than initially anticipated. Additionally, routine under-reserving can also affect the insurer's overall risk management strategy and its ability to meet regulatory requirements regarding capital and surplus. As a result, it becomes crucial for the insurer to assess and adjust its reserving policies adequately to maintain financial stability and solvency in the face of claims obligations.