Closed Case Method for Reviewing the Adequacy of Loss Reserves [Position Paper]

Comparison of the cost of closed claims to reserves has been used for many years, often simplistically, to evaluate loss reserve adequacy. Recently a particular “closed case” method, developed by the Internal Revenue Service, has received attention within the insurance industry. The Committee on Reserves has reviewed this method for its adherence to sound actuarial principles. The Committee finds that the closed case method is seriously inconsistent with the Casualty Actuarial Society’s “Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Liabilities” and is inappropriate for testing the adequacy of loss reserves. The following statement expands upon this finding.