How big is large? : A study of the limit for large insurance claims in case reserves

Abstract: A company issuing an insurance will provide, in return for a monetary premium, acceptance of the liability to make certain payments to the insured person or company if some beforehand specified event occurs. There will always be a delay between occurrence of this event and actual payment from the insurance company. It is therefore necessary for the company to put aside money for this liability. This money is called the reserve. When a claim is reported, a claim handler will make an estimate of how much the company will have to pay to the claimant. This amount is booked as a liability. This type of reserve is called; "case reserve". When making the estimate, the claim handler has the option of giving the claim a standard reserve or a manual reserve. A standard reserve is a statistically calculated amount based on historical claim costs. This type of reserve is more often used in small claims. A manual reserve is a reserve subjectively decided by the claim handler. This type of reserve is more often used in large claims. This thesis propose a theory to model and calculate an optimal limit above which a claim should be considered large. An application of the method is also applied to some different types of claims.