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Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Liabilities

Published online by Cambridge University Press:  29 August 2014

Committee on Loss Reserves
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The purpose of this statement is to provide general guidelines for the use of actuaries engaged in the establishment and review of loss and loss adjustment expense reserves. It is a statement of the Casualty Actuarial Society's Committee on loss Reserves. The statement consists of three parts.

1. Definitions

2. Considerations

3. Procedures

The balance sheet of the Fire and Casualty Annual Statement includes liabilities that are not subject to precise valuation. The reserves for unpaid losses (line 1, page 3 of the Annual Statement) and the reserve for unpaid loss adjustment expense (line 2, page 3 of the Annual Statement) cannot be precisely determined in advance. These reserves must be estimated. Because of their relative size and the difficulty in achieving accurate estimates of their values, these liabilities are vitally important balance sheet items. It is important that proper actuarial and statistical procedures be employed in order to improve the likelihood of reliable reserve estimates. Without reliable reserve estimates, an accurate evaluation of the financial condition of a fire and casualty insurer cannot be accomplished.

Loss reserving involves the current financial evaluation of costs associated with future contingent events, a matter of fundamental interest to actuaries. The contingencies involved are those factors which affect the cost of future payments on insured events which have already occurred. As ratemaking is another application of the same estimating process, the actuarial methodology is similar in many respects.

The definitions in the next section apply to both loss reserves and loss adjustment expense reserves.

For the purpose of this statement the terms “loss” and “claim” will be used interchangeably.

Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 10 , Issue 3 , December 1979 , pp. 305 - 317
Copyright
Copyright © International Actuarial Association 1979

References

SUPPLEMENTAL READING LIST

General Reading

[1] Salzman, Ruth, “Estimated Liabilities for Losses and Loss Adjustment Expenses”, Chapter 3 of Robert Strain's Property Liability Insurance Accounting, published for IASA (Insurance Accounting and Statistical Association) by The Merrit Company Insurers Press Products.Google Scholar
[2] Skurnick, David. (1973). A Survey of Loss Reserving Methods, PCAS (Proceedings of the Casualty Actuarial Society), 60, 16. This article, which covers both loss reserving and loss adjustment expense reserving, is a comprehensive and definitive survey, with commentary, of the important material published on reserving since 1933.Google Scholar
[3] Michelbacher, F. G. and Roos, N. R. (1970). Multiple-Line Insurers, Their Nature and Operations, 181–202, McGraw-Hill Book Company.Google Scholar
[1] Balcarek, R. J. (1961). Reserves for Reopened Claims on Workmen's Compensation, PCAS, 68, 1.Google Scholar
[2] Balcarek, R. J. (1966). Effect of Loss Reserve Margins in Calendar Year Results, PCAS, 52, 1.Google Scholar
[3] Berquist, J. R. and Sherman, R. E. (1978). Loss Reserve Adequacy Testing: A Comprehensive, Systematic Approach, PCAS, 65.Google Scholar
[4] Bornhuetter, R. L. and Ferguson, R. E. (1972). The Actuary and IBNR, PCAS, 59, 181.Google Scholar
[5] Ferguson, R. E. (1971). Actuarial Note on Workmen's Compensation Loss Reserves, PCAS, 58, 51.Google Scholar
[6] Fisher, W. H. and Lange, J. T. (1973). Loss Reserve Testing: A Report Year Approach, PCAS, 60, 189.Google Scholar
[7] Fisher, W. H. and Lester, E. P. (1975). Loss Reserve Testing in a Changing Environment, PCAS, 62, 154.Google Scholar
[8] Harwayne, F. (1958/1959). Estimating Ultimate Incurred Losses in Auto Liability Insurance, PCAS, 45, 63, and Some Further Notes on Estimating Ultimate Incurred Losses in Automobile Liability Insurance, PCAS, 46, 59.Google Scholar
[9] McClenahan, C. L. (1975). A Mathematical Model for Loss Reserve Analysis, PCAS, 62, 134.Google Scholar
[10] Resony, A. V. (1972). Allocated Loss Expense Reserves, PCAS, 59, 141.Google Scholar
[11] Simon, L. J. (1970). Distortion in IBNR Factors, PCAS, 57, 64.Google Scholar
[12] Tapley, D. A. (1956). Month of Loss Deficiency Reserves for Automobile Bodily Injury Losses Including Reserves for Incurred But Not Reported Claims, PCAS, 63, 166.Google Scholar
[13] Tarbell, T. F. (1971). Incurred But Not Reported Claim Reserves, PCAS, 20, 1933, 275. Reprinted in PCAS, 58, 83.Google Scholar
[1] Brian, R. E. (1967). Formula Reserving for Loss Expense, PIASA (Proceedings of the Insurance Accounting and Statistical Association), 498.Google Scholar
[2] Petz, E. F. (1974). Testing and Evaluating Loss Expense Reserves, PIASA, 693.Google Scholar
[3] Sampson, R. D. (1959). Establishing Adequacy of Reserves on Slow Closing Lines—Use of Paid Loss Formulae, PIASA, 306.Google Scholar
[4] Scheibel, J. E. (1970). Developments in Formula Reserving Methodology, PIASA, 550.Google Scholar
[5] Singer, P. E. (1959). IBNR Reserves Including Reopened Cases, PIASA, 240.Google Scholar
[6] Slifka, R. S. (1968). Testing of Loss Adjustment (Allocated) Expense Reserve, PIASA, 291.Google Scholar
[1] Bragg, J. M. (1964). Health Insurance Claim Reserves and Liabilities, TSA, 16, 17.Google Scholar