Empirical Measure of Reserve Level Uncertainty Relative to Discounting and Financial Solvency for a Monoline Medical Professional Liability Insurer

A monoline medical professional liability insurer faces an unusual degree of solvency risk related to the adequacy of its loss and loss adjustment expense reserves. The issue addressed in this paper concerns how the magnitude of the accumulated investment income earned on assets corresponding to these reserves compares to the uncertainty in the reserve, and how this can be used to assess the financial strength of insurers writing long tailed coverages. An empirical approach is used to measure the uncertainty in loss reserves and the result is expressed in terms of the annual interest rate that must be earned on assets corresponding to the reserves. The level of uncertainty is the” compared with available interest rates to determine if the uncertainty “uses up” the full earning power. If only a portion of this earning power is used up by the uncertainty, the company might discount its loss reserves while still maintaining a” adequate safety margin.