Peaks and Troughs: Reserving Through the Market Cycle

It is well-known that the carried reserve adequacy of the property & casualty industry as a whole varies across the market cycle. We examine the extent to which this variation results from actuarial methods themselves, concluding that about half of the industry’s historical deficiencies and redundancies have resulted from actuarial methods. The deficiencies and redundancies that result from actuarial methods appear to be highly correlated with the economic cycle. At the same time, there is also a strong relationship between the underwriting cycle and carried reserve adequacy. Implications for uncertainty in the industry’s aggregate reserve adequacy as well as for individual companies are considered.

Keywords: Reserving, reserve variability, reserving methods