Is the 'Best Estimate' Best?

The NAIC has recently approved its codification of Statutory Accounting Principles. Statement of Statutory Accounting Principles (SSAP) No. 55, “Unpaid Claims, Losses, and Loss Adjustment Expenses,” states that recording a liability for unpaid claims, losses, and loss adjustment expenses shall be based on management’s best estimate, with exceptions if no one point in a range is better than another. The authors discuss SSAP No. 55 and compare it to Financial Accounting Standards Board Statement No. 5. They also discuss the different concepts of “best estimate” from an actuarial, accounting, and management standpoint. The authors provide some actuarial “rules of the road” to help ensure that the actuary’s responsibility to opine on loss and loss expense reserves can be achieved when different accounting and actuarial standards apply. Excerpts from FASB Statement No. 5, “Accounting for Contingencies,” and Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss: an interpretation of FASB Statement No. 5,” copyright Financial Accounting Standards Board, Norwalk, Connecticut 06856, are included by permission. Complete copies of the documents are available from the FASB.