Testing the Reasonableness of Loss Reserves: Reserve Ratios

This paper introduces the idea of using "reserve ratios" as tools for testing the reasonableness of loss reserves. The reserve ratios introduced in this paper are the ratios of IBNR to premium, IBNR to reported loss, IBNR to paid loss, total reserve to premium, and total reserve to paid loss. These reserve ratios are shown to have relevance, not just by accident year within a line of business, but on a composite basis: across accident years, across lines of business, across companies, and across industry groups. The idea is demonstrated using a database of reinsurance company reserves over a test period spanning accident years 1980-1998, as well as summaries of insurance industry reserves for the period spanning accident years 1991-2000. A general blueprint for using these ratios is also presented, along with a series of observations to provide additional perspective for the use of this tool.