Reserve Range, Board Pressure and Subsequent Event
At 31 December 2024 a general insurer's net reserve point estimate is ₹850 crore, with an actuarial range of ₹790 crore to ₹940 crore. The booked reserve is ₹850 crore. In February 2025, before the board signs the annual accounts, a claim from a December 2024 accident is notified at ₹60 crore, above the largest claim in the valuation data. The CFO wants to book ₹790 crore, the bottom of the range, to lift the solvency ratio from 1.55 to 1.62 and avoid a capital injection. The Appointed Actuary's peer reviewer believes the new claim should shift the range upward and that the bottom of the range is no longer supportable. The audit committee has asked for a short note on the reserve estimate, the subsequent event and the actuary's professional position.
1. Set out the actuary's professional obligations and how the subsequent event should be treated.
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Professional position. The actuary must be objective and not allow a desired solvency ratio to determine the reserve. The bottom of the range (₹790 crore) was supportable before the new claim; the ₹60 crore notification is a subsequent event that provides evidence about conditions at 31 December 2024 and should be reflected if material. It is above the largest claim in the data, so it may indicate the tail is understated. Treatment. Revise the estimate and range for the known claim, consider whether the range should shift upward, and document the adjustment. Do not simply hold ₹790 crore to reach 1.62 times solvency. Standards. Follow the applicable actuarial standards and code of conduct: communicate uncertainty, keep records, and escalate if pressured. Conclusion. The actuary should sign only an estimate that is supported by the evidence; if the board books an unsupported figure, record the disagreement and consider informing the audit committee or regulator as appropriate.
2. Draft the key contents of the note to the audit committee and the response to the CFO.
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Note to the audit committee. Set out: (i) the original point estimate ₹850 crore and range ₹790–940 crore; (ii) the new ₹60 crore claim and why it changes the tail; (iii) the revised range and point estimate; (iv) the solvency effect and the fact that a reserve release would be artificial; (v) the actuary's recommendation. CFO discussion. Explain that capital needs should be met by capital, reinsurance or reduced growth, not by understating liabilities. Offer a sensitivity showing the impact of the claim at different gross and net amounts. Documentation. Record the data, method, judgements, peer-review comments and any pressure. Communication. Be clear, concise and consistent: the reserve is an estimate with uncertainty, and the actuary's sign-off cannot be traded against a solvency target.