Applications of Reserve Ranges and Variability in Practice

Motivation. Actuaries are faced with increased questions on reserve variability and "reasonable ranges.” As consultants Mr. Littmann and Mr. Walker confront these questions frequently. We believe a survey of current uses of ranges, how actuaries may adequately address “reasonableness” in a way that is approachable to users, and how these methods may be bridged with more theoretical methods would be beneficial to actuaries and other interested parties.

Method. We present examples of sensitivity testing and how, using a consistent data set, illustrative conclusions on how range estimates may be derived. We also extend the examples with the application of the Mack technique for evaluating a distribution of possible outcomes and investigate the potential relationship between a range of reasonable estimates with distributions of possible outcomes.

Results. Our “results” are primarily illustrations that give the practitioner easy to develop ranges and may also provide a framework for application to a company’s aggregate reserve position and “reasonable range.”

Conclusions. "Actuarial judgment” will not satisfy the questions being asked of actuaries on ranges and variability. Actuaries need to have a structure in place to provide evidence/illustrations of variability.

Keywords: Reserve Variability; Reserve Ranges; Thomas Mack, sensitivity testing, distribution of possible outcomes.