F.1. Goals of Reserving

Question 1

Why accurate estimates of unpaid claims are important

Answer 1

Internal management: used to make business, strategic, and financial decisions
Investors: impact profitability and returns to investors
Regulators: monitors solvency

Question 2

Accounting and valuation date definitions

Answer 2

Accounting: defines group of claims being analyzed, and determines date for paid/unpaid split
Valuation: Defines the date through which transactions are included in the analysis

Question 3

5 components of unpaid claims

Answer 3

1. Case reserves
2. IBNER
3. Reopened case reserves
4. Pure IBNR
5. Provision for claims incurred and reported but not recorded

Question 4

First principle of reserving

Answer 4

An actuarially sound claims reserve for a defined group of claims as of a given valuation date is a provision, based on estimates derived from reasonable assumptions and actuarial methods, for the unpaid amount required to settle all claims, whether reported or not, for which liability exists on a particular accounting date.

Question 5

Second principle of reserving

Answer 5

An actuarially sound LAE reserve for a defined group of claims as of a given valuation date is a provision, based on estimates derived from reasonable assumptions and appropriate actuarial methods, for the unpaid amount required to investigate, defend and effect the settlement of all claims, whether reported or not, for which LAE liability exists on a particular accounting date.

Question 6

Third principle of reserving

Answer 6

The uncertainty inherent in the estimation of required provisions for unpaid claims or LAE implies that a range of reserves can be actuarially sound. The true vaule of the liability for losses or LAE at any accounting date can be known only when all attendant claims have been settled.

Question 7

Fourth principle of reserving

Answer 7

The most appropriate reserve within a range of actuarially sound estimates depends on both the relative likelihood oof estimates within the range and the financial reporting context in which the reserve will be presented.