F.1 Goals of Reserving

Question 1

Why accurate estimates of unpaid claims are

important

Answer 1

1. Internal Management: The estimates are used to make
   business decisions in pricing and underwriting, as well as
   strategic and financial decisions.
2. Investors: The estimates impact the profitability of the
   insurer and thus the returns paid to investors.
3. Regulators: The estimates are used to monitor the solvency of the insurer.

Question 2

Accounting and valuation date definitions

Answer 2

1. Accounting date: This defines the group of claims being analyzed, and determines the date for the paid/unpaid split.
2. Valuation date: This defines the date through which
   transactions are included in the analysis, and this could be the same as, prior to, or after the accounting date.

Question 3

5 components of unpaid claims

Answer 3

1. Case reserves
2. Provision for development on known claims
3. Reopened claims reserve
4. Provision for claims incurred but not reported (aka “pure” IBNR)
5. Provision for claims in transit (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 appropriate 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 loss adjustment expense 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 loss adjustment expense 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 loss adjustment expenses
implies that a range of reserves can be actuarially sound.
The true value of the liability for losses or loss adjustment
expenses 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 of estimates within the range and the financial reporting context in which the reserve will be presented.