Loss Reserving for Solvency

Loss reserving plays an important role in safeguarding a casualty insurance company's solvency. The specific role, however, depends upon the size of the carrier. For example, the primary threat to the surplus of most large, multiline insurers is the sudden and unanticipated development of losses from prior accident years. For such a carrier, loss reserving promotes solvency in the most direct manner possible - by attempting to maintain adequate reserves for each unresolved accident year. Of course, small casualty insurers share this concern over loss reserve adequacy. For this second type of carrier, however, adverse loss development represents only one of several ongoing threats to its existence. A small insurer's surplus can also fall victim to less controllable hazards, such as a year or two of poor underwriting results or undetected rate level deficiencies. To combat these added dangers, the capital structures of new, monoline casualty companies often incorporate features seldom seen in larger carriers. Small insurers, for instance, sometimes employ policyholder assessments and expensive, low level reinsurance as primary defenses against surplus impairment.