What is the role of reserves in regard to employer premium calculations?

The role of reserves in employer premium calculations, particularly for retrospective policies, is significant because they provide a financial estimate of the future costs associated with claims that have been incurred but not yet paid. Reserves reflect the insurer's expectation of the total costs for these claims and are used to determine the potential exposure and liability the insurer faces.

For retrospective policies, which adjust premiums based on the actual loss experience of the employer, reserves play a critical role in calculating the employer's ultimate premium. The more claims that are reserved, the higher the future costs may be, which can directly impact the calculation of premiums due. Therefore, accurately estimating reserves is essential for insurers to set appropriate premiums reflecting the employer's risk and loss experience.

This understanding is crucial in the claims adjusting process as it helps both insurers and employers manage financial planning and expectations regarding future claim costs and how they relate to premium liabilities.