Reserving for general insurance liabilities: technical provisions, claims development, methods and uncertainty
What the domain tests
This domain asks you to turn claims history into a defensible central estimate of general insurance liabilities and to explain the uncertainty around it. SP7 expects you to know how technical provisions are built, how development triangles behave, and when a reserving method is inappropriate.
Core rules
- Technical provisions = best estimate of future claim payments plus a risk margin. The best estimate includes case reserves, IBNR, IBNER, and unallocated loss adjustment expenses (ULAE); reinsurance recoveries are assessed separately as an asset.
- Chain ladder uses cumulative paid or incurred claims and volume-weighted development factors. The tail factor extends beyond the observed triangle.
- Bornhuetter-Ferguson blends an expected loss ratio with reported claims; Cape Cod derives the expected loss ratio from the data. Frequency-severity and average-cost methods are useful when triangles are immature.
- Uncertainty has process and parameter components. Mack's chain ladder gives a standard error; bootstrap and over-dispersed Poisson models allow simulation. Correlations between classes matter.
Worked example
Cumulative paid claims (₹m) are: AY2021 400, 600, 720, 780; AY2022 440, 660, 792; AY2023 484, 726; AY2024 532. Volume-weighted factors: f1 = (600+660+726)/(400+440+484) = 1.500; f2 = (720+792)/(600+660) = 1.200; f3 = 780/720 = 1.0833. AY2024 ultimate = 532 × 1.500 × 1.200 × 1.0833 = 1,037.4, so the reserve is 505.4. This excludes a tail, discounting, ULAE, and risk margin.
Traps
Using simple-average factors on thin data; omitting the tail; double-counting IBNER; discounting at a rate inconsistent with the payment pattern; treating reinsurance recoveries as certain; mixing paid and incurred triangles; ignoring changes in case-reserving philosophy.