Loss Reserve Certification—Standards and Issues

This paper will attempt to formulate some of the concepts a casualty actuary should consider when deciding whether or not to certify loss and loss expense reserves. The approach will be from the perspective of what considerations and thought processes the actuary should go through. There is presently little or no literature available in helping the practicing casualty actuary decide whether or not he/she can certify a company's reserves. The complexity of this issue does not allow an approach as simple as show close are the booked reserves to the actuarially indicated reserves?- The problem is obvious if one considers a company with a 5% reserve deficiency and a reserves to surplus (R/S) ratio of 10 to 1 versus a company with a 10% deficiency and a R/S ratio of 3 to 1. Another obvious difficulty arises when one considers a strongly capitalized company with potentially deficient reserves versus the weakly capitalized company with potentially adequate reserves. (1) Issues to be addressed will include: (1) What standards, if any, are presently in use? (2) To what extent should company financial condition enter the decision? (3) A probability of ruin model is proposed as a conceptual framework for further discussion and around which the CAS and NAIC could develop guidelines for reserve certification.