CAS Exam 7 key terms

The dollar amount a claims adjuster currently sets aside for a specific reported claim, based on known facts. It is the starting point that development methods later refine into an ultimate estimate.

A development technique that estimates ultimate losses by multiplying reported losses to date by cumulative age-to-ultimate factors derived from historical patterns. It assumes past development ratios remain stable and requires a sufficiently mature triangle.

The ratio of cumulative losses at one evaluation age to cumulative losses at the prior age, averaged across accident years. Multiplying successive factors produces age-to-ultimate factors used in chain-ladder projections.

A table arranging cumulative losses by accident year and evaluation age, so each row shows how estimates matured over time. Diagonal cells share a common valuation date, and gaps reveal immature years needing projection.

A reserving technique blending an a priori expected loss ratio with actual reported development. It weights the expected ultimate by the unreported percentage and observed losses by the reported percentage, reducing sensitivity to thin or volatile data.

A reserving approach that sets ultimate losses as a selected loss ratio multiplied by earned premium or exposure, ignoring reported loss emergence. It suits new lines or immature years where development data are unreliable.

A loss ratio chosen before considering the current year's reported losses, drawn from industry benchmarks, pricing assumptions, or prior experience. It serves as the expected-value input in Bornhuetter-Ferguson and expected loss ratio methods.

The provision for claims incurred but not yet reported, plus revisions to case reserves on known claims. It is the difference between estimated ultimate losses and losses already reported or paid.

An additional reserve held outside individual case files to cover deficiencies in case outstanding, such as inadequate adjuster estimates or expected reopening of closed claims. It complements rather than replaces IBNR.

The calendar year in which a loss event occurs, regardless of when the policy was written or the claim reported. It groups losses for development analysis so that each cohort matures on a comparable schedule.

The grouping of losses by the calendar year in which the covering policy incepted, so all losses from a given policy period stay together. It differs from accident year when claims occur in later years, such as on occurrence-based coverage.

The calendar year in which a claim is first reported to the insurer, used to analyze reporting lag and case reserve adequacy. It is less common than accident year for projecting ultimate losses.

Recoveries from disposing of damaged property or from pursuing third parties responsible for a loss. Reserving must estimate these recoveries and present losses net of expected amounts, since they reduce ultimate cost.

Costs of investigating, defending, and settling claims, split into allocated expenses tied to specific claims and unallocated overhead. Reserves must cover both, and the expense ratio is often projected separately from loss dollars.

The total estimated cost of all claims from a defined cohort, including amounts already paid, case reserves, and IBNR. It is the target of every reserving method and the basis for the loss reserve balance sheet figure.

The practice of reducing carried reserves to present value using an assumed interest rate and payout pattern. It is permitted or required in some regulatory and tax contexts, and the accretion of discount is later recognized as expense.

The expected timing of claim payments by age, expressed as the percentage of ultimate losses paid in each period. It drives discounting, cash flow projections, and duration matching of reserves with invested assets.

Whether carried reserves are sufficient to cover ultimate obligations, assessed through range estimates, historical development, and stress testing. Adverse development indicates prior reserves were too low and reduces current earnings.

An interval of reasonable ultimate loss estimates produced by applying multiple methods and assumptions. Actuaries communicate a point estimate within the range plus the uncertainty around it, rather than a single number alone.

The actuary's single best estimate of reserves, reflecting expected outcomes rather than conservative or optimistic extremes. It anchors financial reporting, while sensitivity ranges inform risk and capital discussions.

The emergence of ultimate losses above previously estimated levels, requiring reserve strengthening. It signals inadequate pricing, underestimated severity trends, or flawed assumptions and directly hits current-period income.

The expected rate of change in claim frequency and severity over time, used to adjust historical losses to the level of the projected period. Trend selection combines frequency, severity, and social or legal inflation components.

The number of claims per unit of exposure, such as per policy or per million of payroll. Frequency times severity yields the pure premium, and both components are projected separately when trends diverge.

The average cost per claim, obtained by dividing total losses by claim count. Severity trends reflect inflation, litigation, medical cost, and changes in claim mix, and are projected independently of frequency.

Losses divided by exposure units, representing the expected loss cost per unit of risk before expenses and profit. It is the building block of manual rates and is loaded for expenses and profit to produce a final rate.

An enterprise valuation approach projecting future cash flows and discounting them at a rate reflecting time value and risk. For insurers, cash flows derive from underwriting results, investment income, and reserve run-off.

The required return demanded by providers of debt and equity, used as the discount rate in valuation. It reflects the riskiness of the cash flows and the firm's capital structure and market conditions.

The estimated value of all cash flows beyond the explicit projection horizon, often the largest part of a valuation. It is commonly computed as a perpetuity growth or exit multiple applied to the final projected year.

The present value of future profits from business already on the books plus the adjusted net worth of the company. It measures value already earned and excludes the worth of future new business.

Embedded value plus the value of expected future new business, sometimes called franchise value. It represents a fuller market view of an insurer and is compared with market capitalization to assess mispricing.

A model setting required return as the risk-free rate plus beta times the market risk premium. Beta measures sensitivity to market movements, and the resulting rate is a common input to cost of equity.

A measure of how much a security's returns move relative to the overall market, used in the capital asset pricing model. A beta above one indicates greater market sensitivity and a higher required return.

A performance measure equal to net operating profit after tax minus a capital charge for the capital employed. Positive values indicate the business earned more than its cost of capital.

A profitability ratio dividing risk-adjusted profit by the economic capital allocated to an activity. It lets management compare businesses with different risk profiles on a consistent basis.

The amount of capital a firm needs to hold to remain solvent at a chosen confidence level over a chosen horizon. It is derived from the loss distribution and differs from regulatory capital, which follows prescribed formulas.

The loss threshold that is not expected to be exceeded with a specified probability over a specified horizon. It is widely used for capital setting but ignores the size of losses beyond the threshold.

The average loss conditional on losses exceeding the value at risk threshold. It captures the severity of extreme outcomes and is a coherent risk measure, unlike value at risk.

A firm-wide framework for identifying, measuring, and managing risks across underwriting, market, credit, and operational categories. It links risk appetite to capital allocation and integrates risk into strategic decisions.

The amount and type of risk an organization is willing to accept in pursuit of its objectives, expressed qualitatively and quantitatively. It guides limits, capital allocation, and underwriting decisions.

The acceptable variation in results around the risk appetite, often expressed as deviation from target earnings or capital. It translates broad appetite statements into operational limits and triggers for action.