Risk Theoretic Issues in Loss Reserving: The Case of Workers Compensation Pension Reserves

Opposition to the discounting of loss reserves is based on the premise that loss reserves are uncertain and insurance companies must retain additional funds in order to reduce the chance of insolvency. This paper explores the explicit calculation of a risk load for discounted loss reserves. Underlying considerations include: (1) the random nature of the claim settlements; (2) our ability to describe the distribution of actual results; and (3) how the risk load we use for loss reserves compares to the profit load we use for pricing insurance. These ideas are expressed in terms of an example: Workers' compensation pension reserves. The research for this paper was supported by a grant from the Society of Actuaries upon recommendation of the Actuarial Education and Research Fund.