A Behavioral Approach to Understanding Loss Reserves

This paper takes a deep dive into historical loss reserves. Using Schedule P company filings, it is shown that reserves are very slow to react to emerging losses, much slower than the most accurate approach would dictate. There are other concerns besides accuracy, such as stability and avoiding deficient reserves. But attempting to explain the discrepancy in this manner alone would require a level of risk aversion that is unrealistic. Instead, it is shown that the corporate environment causes increased conservatism, and when coupled with narrow framing is able to explain company practice.