Motivation The development of a wide variety of reserve variability models has been primarily driven by the need to quantify reserve uncertainty. This quantification can serve as the basis for satisfying a number of Solvency II requirements in Europe, can be used to enhance Own Risk Solvency Assessment (ORSA) reports, and is often used as an input to DFA or Dynamic Risk Models, to name but a few. Moving beyond quantification, the purpose of this paper is to explore other aspects of reserve variability which allow for a more complete integration of these key risk metrics into the larger Enterprise Risk Management framework.
Method This paper will primarily use a case study to discuss and illustrate the process of integrating the output from periodic reserve and reserve variability analysis into the enterprise risk management process. Consequences of this approach include the production of valuable performance indicators and an increase in the lines of communication between the actuarial function and other insurance functional departments, both of which are valuable to management.
Results By expanding the regular reserving process to include regular variability analysis and expanding the dialogue with management, the actuary can greatly contribute to the understanding of risks related to claim management within an enterprise.
Conclusions The value of this process is not limited to reserving as it can logically and directly be extended into pricing, reinsurance optimization, etc.
Availability In lieu of technical appendices, companion Excel workbooks are included that illustrate the calculations described in this paper.
Keywords Reserve variability, enterprise risk management, actual versus expected, back-testing, deviations from expectation, one-year time horizon, validation, reserve distribution testing, assumption consistency, run-off analysis, key performance indicator.
