Reserving for general insurance liabilities
This domain tests whether you can estimate ultimate claims and the reserve needed, choose an appropriate method, allow for inflation and recoveries, and communicate uncertainty.
Core concepts
- Reserve components: case reserves, IBNR, IBNER, claims-handling costs and ULAE. Technical provisions also include unearned premium and, where relevant, an unexpired risk reserve.
- Methods: chain ladder, Bornhuetter-Ferguson, Cape Cod, frequency-severity, case-outstanding and expected loss ratio. Mack and bootstrap methods add an estimated prediction error.
- Key adjustments: claims inflation, discounting, reinsurance recoveries and bad-debt allowance, latent claims, legal changes and Ogden-type assumptions.
Worked example
For accident year 2024, paid claims to date are £800,000 and the chain-ladder development factor is 1.25, giving an ultimate of £1.0m and IBNR of £200,000. A Bornhuetter-Ferguson check uses expected loss ratio 60% on earned premium £1.5m, so expected ultimate = £900,000. With 60% credibility to the chain ladder, the BF ultimate = 0.6 × £1.0m + 0.4 × £0.9m = £960,000, and IBNR = £160,000. The difference is a signal to investigate case strength and the development pattern, not to average blindly.
Traps that cost marks
Treating case reserves as ultimate; ignoring claims inflation or discounting without stating the basis; omitting ULAE and reinsurance bad debt; using a development factor from a different mix of business; and presenting a single reserve without a range or sensitivity.
Exam tip
Explain why the selected method suits the data. Immature years usually need more expected-loss-ratio weight; mature years can rely more on development.