Estimating and reserves
Reserve Rationale Memo Template & Example
Last updated 2026-08-03
A number without a rationale is a number the next reviewer replaces. That is the whole argument for this memo. The reserve you set is an estimate of ultimate exposure built from specific inputs, and if those inputs are not written down, the person who reads the file in six weeks has nothing to test — so they substitute their own judgment, and the file's history becomes a series of unexplained movements.
The memo has three jobs and they are separable. It states the figure and how it was arrived at. It states what is not yet in the figure, which is usually the part that moves. And it states the triggers: the specific events that would require the reserve to change, each with a date by which you expect to know. The third job is the one most reserve entries skip, and it is the one that turns a static number into something a supervisor can diary against.
The worked example below is written against a fictional water loss and does not tie off neatly. The exposure turns partly on a question the file has not answered, and the memo holds the reserve at full exposure rather than discounting it toward a coverage outcome nobody has reached yet. That is deliberate. Reserving to an outcome you hope for is how a file ends up strengthening late and badly.
Jurisdiction
Written primarily against US first-party property practice. Claim handling is regulated state by state — acknowledgment and response deadlines, prompt-payment requirements, adjuster licensing and unfair claims practices standards all differ — and the policy actually issued governs the claim. Where a page cites a statute, model act or regulation, confirm what applies in the state where the loss occurred. Outside the US, treat the structure as transferable and the legal references as not.
Reserve Rationale Memo template
Free Word download, no email required. Or open it in Professional Drafter — it lands in your template library, ready to draft against.
When to use this document
- At the first reserve entry on any file above the desk-adjusting threshold, and again at every material change.
- When the reserve moves by more than the file's change threshold, where the memo is the record of why rather than the notice that it happened.
- When a coverage question, a subrogation prospect or an unpriced component means the current figure rests on an assumption a reviewer would not otherwise see.
Worked example
Fictional scenario: the Harbour Lane water loss, claim PC-2026-11482, at the first full reserve entry on 21 July 2026. The building estimate is complete, the contents are not priced, and the exposure turns partly on a duration question the file has not answered. The memo holds the reserve at full exposure rather than discounting it toward a coverage outcome nobody has reached.
Claim identification and reserve summary
Claim PC-2026-11482. Insured D. Okonjo, 118 Harbour Lane. Date of loss reported 14 July 2026, discovered approximately 07:15. Coverages implicated: dwelling, unscheduled personal property. Adjuster R. Calloway; examiner C. Mendez.
Prior reserves, set at assignment on 15 July on the FNOL description alone: indemnity $7,500, expense $1,000. New reserves effective 21 July 2026: indemnity $19,000, expense $2,500. Net change: indemnity +$11,500, expense +$1,500.
The assignment reserve was a formula figure set before inspection. It is superseded by the inspection of 18 July and the estimate of 20 July, and the movement should be read as the first informed entry rather than as a strengthening.
Basis of the indemnity reserve
Building estimate prepared by the writer 20 July 2026: $18,340 RCV, $17,890 ACV. The $450 difference is depreciation on three line items only (paint, base trim, one prefinished shelf unit); the depreciation worksheet in the file carries the age and life inputs.
Contents are not priced. The insured provided an inventory of fourteen cartons of stored books on 18 July with counts but no values. Pending pricing, I am carrying a placeholder of $1,900, derived from a per-carton figure of roughly $135 taken from two comparable files. That is a placeholder and not an estimate, and I expect it to move.
Other structures: nil. The detached garage was inspected and is undamaged. ALE: nil. The dwelling remained habitable throughout; kitchen, bathrooms and bedrooms were unaffected and the insured has not requested displacement.
Arithmetic: building RCV $18,340 plus contents placeholder $1,900 equals gross exposure of $20,240. The $2,500 all-peril deductible applies once to the occurrence, giving a net indemnity exposure of $17,740. No payments have been issued.
The reserve is set at $19,000, which is $1,260 above that figure. The contingency is specific rather than general: the wicking line was photographed at 14 inches along the full 31 LF, the estimate provides for removal to 24 inches, and if the drying logs show the run continued behind the shelving standards on the west wall, that section is opened and replaced rather than dried. I priced that possibility at roughly $1,200.
Basis of the expense reserve
Independent adjusting fee, estimated to conclusion at the schedule rate: $1,450. Contents pricing service for the book inventory, quoted 19 July: $300. Photography and file production: $150.
Contingent: a plumbing consultant on the duration question, quoted at $600 for a records-and-components review. I have not recommended this retention and would want written authorization from the examiner before instructing anyone. It is included in the reserve so that authorizing it later is a decision rather than an overrun.
Total expense reserve $2,500, of which $600 is contingent on item 3 in the memo's trigger list below.
Known exposures not yet quantified
1. Contents pricing. Fourteen cartons of books, counted but not valued. The placeholder is $1,900. Books are the hardest contents category to price quickly because condition drives most of the spread and the insured has described two volumes as signed first editions. If those are what he says they are, they alone could exceed the placeholder. Magnitude: unbounded on the current information, which is precisely why it is listed. Expected resolution 5 August.
2. Concealed damage behind the west-wall shelving standards. Priced at roughly $1,200 and inside the contingency above. Expected resolution on demolition, target 29 July.
3. Duration of the release. Not an unquantified exposure so much as an unresolved one; it does not increase the figure, and its effect is dealt with in the next section.
What would move this number
1. Contents inventory returns priced above $1,900. Owner: writer, chasing the insured and the pricing service. The captioned report of 20 July carried a target of 25 July for this; the pricing service quoted a ten-working-day turnaround on receipt of the list, so the realistic date is 5 August and that is the date used here rather than the one already in the file. Effect: indemnity up by the excess, dollar for dollar. On the insured's description of two of the volumes I would not be surprised by $3,000 to $4,000.
2. Demolition on 29 July exposes wet substrate behind the west-wall standards. Owner: mitigation contractor. Effect: absorbed by the $1,260 contingency up to about $1,200; anything beyond that is an increase.
3. The examiner instructs a plumbing consultant on the duration question. Owner: C. Mendez. Effect: expense up $600 from contingent to committed; no effect on indemnity at the point of instruction.
4. The duration question resolves. The only trigger on this list with no date against it. The insured last occupied the dwelling at 18:00 on 11 July and discovered the loss at 07:15 on 14 July, an interval of roughly 61 hours; nothing in the file narrows it further, and the three things that might have — a water sub-meter, a monthly municipal read, an alarm or occupancy log — do not exist here. The supply is billed quarterly with the next read due in September. My own view of the interval is recorded in the captioned report of 20 July and has not changed. What has not happened is the examiner adopting a position, and until he does the reserve is not written down to one.
I am recording the duration as undetermined rather than estimating it, and I am reserving at full exposure accordingly. Reserving at a discount to reflect a possible exclusion would embed a coverage position this file has not taken and I am not the person to take. If the examiner reaches a position, the reserve follows it and this memo is superseded.
Recovery, salvage and offsets
The indemnity reserve is stated GROSS of anticipated recovery. No offset for subrogation is taken in the $19,000.
Subrogation prospect against the installer. The water heater was replaced eleven months before the loss by Feldstrom Plumbing under invoice 20941 dated 3 August 2025, and the braided line appears to have been supplied and fitted as part of that work. The fitting and line are retained, tagged and photographed. Referred to the recovery unit 20 July 2026 with a recommendation that notice issue before the components are examined further.
Salvage: none of value. The fourteen cartons of books are water-damaged throughout with no resale value; the insured has agreed to retain them pending disposition.
If recovery is achieved it carries the insured's $2,500 deductible pro rata under the file's usual practice; nothing is booked for that now.
Authority, review date and sign-off
The $19,000 indemnity and $2,500 expense figures are within the writer's reserve authority of $25,000 combined. No upward referral required. The examiner is copied because trigger 3 requires his decision and trigger 4 may require his position.
Next scheduled review: 5 August 2026, on the contents pricing, or earlier if the 29 July demolition exposes anything beyond the contingency.
Set by R. Calloway, 21 July 2026. To C. Mendez for information and for a decision on trigger 3.
Section-by-section guide
What each section is for, what a good one contains, and where they typically go wrong.
1.Claim identification and reserve summary
The header exists so a reviewer can orient without opening the file. Prior figure, new figure, and the difference, on indemnity and expense separately. Keep indemnity and expense apart from the first line — they move for different reasons and blending them hides which one moved.
2.Basis of the indemnity reserve
Show the arithmetic, not the conclusion. A reviewer should be able to reproduce your figure from the numbers on the page: the estimate and its date, any contents or other-structures component, the deductible and where it was applied, and any amount already paid. If the reserve is set gross of recovery, say so here rather than leaving a reader to infer it from a figure that looks high.
3.Basis of the expense reserve
Expense reserves are usually set by habit and almost never explained, which is why they are the ones that run out quietly. List the anticipated items and their costs — adjusting fees, experts, vendor pricing services, engineer or consultant retentions you have flagged but not yet authorized. An expense item you have merely recommended belongs here marked as contingent, so that authorizing it later does not read as an overrun.
4.Known exposures not yet quantified
The part that moves. Anything you know exists and cannot yet price: an unpriced inventory, a concealed-damage possibility behind something not yet opened, a supplement the contractor has signalled. Give each one a rough magnitude and say whether it is inside the contingency you carried above or outside it. 'Unknown' is not the same as 'unbounded', and a reviewer needs to know which one you mean.
5.What would move this number
Triggers, each with an owner and a date. This is the section that distinguishes a reserve rationale from a reserve note. Write the specific event — 'inventory returns above $2,500', 'examiner instructs a consultant on the duration question', 'contractor supplements for the adjoining wall' — and what it would do to the figure. A supervisor can then diary the trigger instead of diarying the file generally.
6.Recovery, salvage and offsets
Whether a recovery prospect exists and, critically, whether the reserve is stated before or after it. Most carriers reserve indemnity gross of subrogation and track anticipated recovery separately; if yours does otherwise, this is where the file records it. A reserve quietly netted against a recovery that never materialises is a strengthening waiting to happen.
7.Authority, review date and sign-off
Whose authority the figure sits within, whether it needed a referral upward, and when it will next be revisited. A review date makes the memo self-expiring, which is the point: a rationale written against facts that have since changed is worse than no rationale, because it reads as current.
Common mistakes
The failure modes that show up most often when this document is reviewed later.
Recording the new figure without recording the old one and the difference.
Reserve history is what auditors and reinsurers actually read. A file that shows $19,000 with no trace of the $7,500 it replaced makes the first entry look like a judgment nobody made, when in fact it was a formula figure superseded by an inspection.
Discounting the reserve to reflect a coverage defense the file has not established.
It embeds a position nobody has taken and it understates exposure at exactly the moment the aggregate matters. If the defense fails, the file strengthens late, and late strengthening is what gets a book of claims reviewed.
Netting anticipated subrogation out of the indemnity reserve without saying so.
The figure then looks unaccountably low and no reader can reconstruct why. Worse, a recovery that never lands leaves a shortfall that surfaces at payment rather than at reserving.
Carrying a general contingency instead of a specific one.
A padded number is indistinguishable from a wrong number. A contingency tied to a named possibility with a price can be tested, released when the possibility is eliminated, and defended when it is not.
Listing an expert as an expense you might incur, without saying whether it is authorized.
Two different readers draw opposite conclusions from the same line — one thinks the retention is running, the other thinks it was declined. Mark contingent items contingent and name whose decision they wait on.
Omitting the next review date.
The memo then reads as current forever. A rationale built on an unpriced inventory is accurate for about two weeks, and a stale rationale is more misleading than none because it carries the authority of having been written.
Questions
- How often should a reserve rationale be written rather than just a reserve note?
- At the first informed entry after inspection, and at any change above the file's threshold. Model 910 §6 describes a claim file as one maintained so that the inception, handling and disposition of the claim can be reconstructed from it, which is a documentation standard, not a reserving rule — but a reserve that moves several times with no traceable reason is exactly what fails that test.
- Should the memo be gross or net of subrogation?
- Follow your carrier's convention, and state which one you followed on the face of the memo. The error is not choosing wrongly; it is choosing silently, so that the next reader cannot tell whether a low figure reflects a modest loss or an optimistic recovery assumption.
- Is the reserve rationale discoverable?
- That varies by jurisdiction and by the posture of the case, and it is a question for counsel rather than for a template library. What is safe in every jurisdiction is the discipline: write the basis of the figure and the facts behind it, and do not use the reserve memo as the place to argue a coverage position or to characterize the insured. State the arithmetic and the open questions.
- What if the estimate is not finished when the reserve has to be set?
- Set a placeholder, label it a placeholder, say where the figure came from, and give it a review date. The example above carries $1,900 of contents on a per-carton comparison from two other files and says so in as many words. A labelled placeholder is honest and self-correcting; an unlabelled one gets treated as an estimate by the next reader.
The blank template
Exactly what is in the Word download, so you can see the structure before deciding whether you want it.
Claim identification and reserve summary
Basis of the indemnity reserve
- Estimate figure, date and preparer
- Components not yet priced, and what is standing in for them
- Deductible, applied once or per-coverage
- Payments already issued against this reserve
- Contingency carried, and for what specifically
Basis of the expense reserve
Known exposures not yet quantified
What would move this number
- Trigger, stated as an event rather than a worry
- Effect on indemnity, on expense, or on both
- Owner
- Date by which it should be known
Recovery, salvage and offsets
Authority, review date and sign-off
Download this template
Free Word download, no email required. Or open it in Professional Drafter — it lands in your template library, ready to draft against.
Sources
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This page is a documentation aid, not legal advice and not a coverage opinion. Claim-handling requirements vary by state and by policy wording, and a template cannot tell you what your file requires. The worked example describes a fictional loss.