Loss Reserves: Performance Standards

Loss reserves have a significant impact on the reported operating results as well as on the financial condition of an insurer. Actuarial literature to date has focused on developing loss reserving methods [l]. The matter of assessing the condition [2] of loss reserves, on the other hand, has received relatively little attention. The scarcity of material in this area seems to have given observers of our industry some sort of license to make periodic pronouncements [3] about the adequacy of loss reserves. Security analysts, for example, have made such statements and distributed them throughout the investment community and the insurance industry. The strength of these statements seems to derive mainly from the ability to give them a wide distribution; a subsequent section of this paper suggests that such statements can be speculative and highly misleading. Concurrently and separately, there appears to be within regulatory circles, particularly the National Association of Insurance Commissioners, a movement towards requiring an actuarial opinion on the condition of annual statement loss reserves.