Causes of Reserve Deficiency Among Property-Casualty Insurers: A Survey

In 1994, the Committee on Property and Liability Financial Reporting of the American Academy of Actuaries (COPLFR) surveyed actuaries representing 26 property-casualty insurance companies to determine what factors contributed to adverse reserve development in individual companies’ total loss and loss adjustment expense reserves. The survey results indicated that the major causes of adverse reserve development during the period covered by the survey were: (1) environmental and asbestos liabilities; (2) loss development tail factors; (3) involuntary pool reserves; and (4) unwinding of discount. COPLFR concluded that some recently adopted changes to the annual statement and other regulatory initiatives under consideration can help identify and/or reduce the impacts of some of these elements. However, COPLFR also concluded that the actuarial profession needs to engage in further work on the appropriate treatment of reserves for environmental and asbestos losses and possibly in the estimation of loss development tail factors.