Georgia Adjuster Practice Test

What is the loss reserving method that establishes aggregate reserves for a single line of insurance called?

1. Loss percentage method

2. Claim reserve method

3. Loss ratio method

4. Aggregate reserve method

The correct answer is: Loss ratio method

The loss reserving method that establishes aggregate reserves for a single line of insurance is known as the loss ratio method. This approach calculates the reserves needed based on the relationship between the losses incurred and the premiums earned. Essentially, it analyzes the overall financial performance of that line of insurance by comparing losses to the amount of premium collected, thus providing insights into the sufficiency of the reserves. Using the loss ratio method, insurers can project future losses based on historical data and expected trends. This method helps ensure that there are adequate funds set aside to cover future claims, thereby promoting financial stability and regulatory compliance within the insurance company. The other methods mentioned serve different purposes or apply to different aspects of loss reserving. For example, the claim reserve method is focused on individual claims instead of the aggregate exposure of an entire line of business, while the aggregate reserve method is more general and does not specifically refer to a single line of insurance. The loss percentage method provides a simpler percentage of estimated losses based on earned premiums but doesn’t establish an aggregate reserve in the same detailed manner as the loss ratio method.