Loss Reserve Adequacy Testing: A Comprehensive Systematic Approach

While specific guidelines for reserve adequacy testing may be established and specific examples of an actuarial approach to the testing of loss reserves may be offered for particular situations, loss reserving cannot be reduced to a purely mechanical process or to a “cookbook” of rules and methods. The utilization and interpretation of insurance statistics requires an intimate knowledge of the insurance business as well as the actuary’s ability to quantify complex phenomena which are not readily measurable. As in the case of ratemaking, while certain general methods are widely accepted, actuarial judgment is required at many critical junctures to assure that reserve projections arc neither distorted nor biased.