What does factor or flag reserving entail when reserving on individual policies?

Factor or flag reserving involves setting a standard monetary reserve for each claim of a certain type. This approach is often used in the insurance industry to streamline the reserving process for claims that exhibit similar characteristics or risk profiles. By establishing a standard reserve amount for specific categories of claims, insurers can more efficiently manage their reserves and ensure consistency in handling similar cases.

This method is particularly useful in scenarios where data indicates that claims of a certain type reliably generate costs within a predictable range. By allocating a predefined amount, insurers can react promptly to claims while maintaining financial stability and preparing for the expected payouts. Factor or flag reserving simplifies administrative processes and enhances the accuracy of financial projections for the claims.

Other reserving strategies, such as adjusting reserves based on case complexity, focus on assessing each claim's unique circumstances and the potential costs associated with them. Changing reserves based on the insurer's performance or establishing reserves by geographical location involves different criteria and may not provide the uniformity and efficiency that factor or flag reserving aims to achieve.