What characterizes formula reserves?

Formula reserves are characterized by the fact that they are adjusted periodically based on past loss experience. This approach uses historical data to predict future claims, allowing for a more informed estimation of the liabilities that an insurer may face. By analyzing trends from past losses, adjusters and actuaries can create formulas that help in determining appropriate reserves that will cover future claims while considering variations across different types of claims or policies.

This method provides a systematic and data-driven way to assess reserves rather than relying solely on individual claims or cases. It is essential in ensuring that the reserves are adequately funded to address potential payouts that could arise from claims that have already occurred or are expected to occur in the future. This periodic adjustment based on experience helps to refine the reserves and align them more closely with the true liability of the insurer.

The other options do not accurately describe the nature of formula reserves. They do not exclusively focus on individual claims, are not limited to IBNR claims only, and they are not established solely at the beginning of the fiscal year, as they involve ongoing assessments and adjustments based on evolving data.