Will your reserve cover a bad claims year?
How many claims, times how bad each one is: frequency times severity is how the insurance industry models loss, and it fits lawsuits, recalls, chargebacks and equipment failures just as well.
Legal Intermediate Monte Carlo Pro engine
After you install, this is the model to open.
How Big Could the Claims Year Be?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
Twenty thousand simulated years:
- Claims year, mean
- $71K
- P95 / P99
- $205K / $298K
- Reserve blown
- 12% of trials
Reserving at the average is how a quiet decade ends in one loud year: the mean is $71K but the P95 is $205K. Set the reserve at the P95 and rerun to watch the blown flag collapse; the premium you pay for that certainty is now a number instead of an argument.
The model
Claim count drawn from a discrete table built on your own history (18% none through 4% at five), severity PERT $12K-$30K-$110K with the long right tail bad claims really have, against a $150K reserve.
| Claim count | discrete 0-5 from history |
| Severity | PERT $12K-$30K-$110K |
| Reserve | $150,000 |
| P(reserve blown) | simulated |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- Who is actually carrying the month?Which Lawyer Takes Which Matter?
- Why is your average claim the wrong number?What Do Claims Actually Cost?
- Is intake growing, or does it just feel busy?How Many Matters Are Coming?
- The venue moves the odds. By how much?Does the Court Change the Settlement Rate?
- A legal matter risk register pricing five case risks against mitigation cost, showing which of the five mitigations lose money in expectation. Free template.What Could Go Wrong in This Matter?
- Which contingency matters actually lose you money?Will the Recovery Cover the Costs?
Every model like this one, and the method behind them: Monte Carlo simulation.