Using Best Practices to Determine a Best Reserve Estimate

Currently, many actuaries produce a range of reasonable reserve estimates for IBNR loss and loss adjustment expense. NAIC Issue Paper No. 55 would effectively eliminate the possibility of booking any amount except management’s “best estimate” within this range. The term “best estimate” has not been defined, neither in the issue paper nor in the actuarial literature. We propose to define the best estimate by describing a set of “best practices” -- many already found in the actuarial literature -- that a reserving actuary should follow, while minimizing the number of arbitrary judgments. Central to this paper is the recently introduced Generalized Cape Cod method. Many of these best practices have been shown to lead to minimum bias results. The best estimate, therefore, will be the outcome of following the framework contained in this paper. Keywords: Reserving, IBNR, Generalized Cape Cod, Chain Ladder, Bornhuetter-Ferguson