Regulatory Standards for Reserves

The loss and loss expense reserves of a property and casualty company are the moat important items on the balance sheet and the most difficult to value. Regulators' concerns include but go beyond the question of reserve adequacy, and include a knowledge that the company will be reasonably secure even if the claims environment unfolds in unexpected ways. Some regulators are also concerned that assets appropriately match liabilities. The paper suggests several concepts about the calculation of risk margins that have been used for insurance pricing. It shows how these concepts can be applied to determine a reserve value that reflects the risk associated with the possible eventual claim payments as well as with the expected value of those payments. In addition to concepts, the paper presents specific techniques for distinguishing between individual possible payment outcomes and entire scenarios of associated payments, as well as a basic set of mathematical formulas. The methods suggested by the paper are intended to be a part of an extensive review of reserves, not a modest test that can be applied in the absence of an understanding of a company's operations. As a part of an extensive reserve review the methods presented in the paper contribute a valuable amount of information for a modest additional investment of time.