Best Estimate Loss Reserving: An Actuarial Perspective

Actuarial analysis is, by its nature, a science in which uncertainty is always a factor. Without uncertainty there is no need for an actuary. Actuarial analysis is, nonetheless, based on rigorous, scientific methods and techniques. A primary goal, as with all science, is to provide the best possible understanding of the truth, in spite of those uncertainties. Actuarial science is an applied science. Thus, the profession must be concerned with communicating both within the profession and to an outside audience with varied and sometimes conflicting interests. The goal of this paper is to provide some clear yet scientifically based terminology that will help to facilitate this communication. The paper focuses on one area of actuarial science - the estimation of loss reserves. It examines the need for clear and consistent terminology in this area and proposes two terms. First, the actuarial term “best estimate expected value of unpaid losses” is defined to be the “undiscounted, unmargined, unbiased best estimate of the probability weighted average of all possible unpaid loss amounts”. The second term, “the best estimate loss reserve”, defines the provision for these unpaid losses to be “the present value of the best estimate expected value of unpaid losses”.