The adequacy of general insurance case reserves is key to the success of the business. But it is an area facing many challenges:

• The PRA’s ‘Dear Chief Actuary,’ and ‘Dear CRO,’ letters have expressed concern regarding the weakening of case reserves in the general insurance market - particularly in Third Party Liability classes of business - and the resulting risks to pricing adequacy and ultimately, solvency.
• General insurance reserving relies heavily on the assumption of consistent case reserving. However, consistent case reserving is very difficult to achieve in practice.
• Our experience is that reserving actuaries tend to analyse case reserve adequacy on an ad hoc basis, but we think it should be a core part of the reserving process.

Given these challenges, we thought it would be helpful to publish a ‘best practice’ guide to help reserving actuaries strengthen their approach.   

Our guide is in the format of a regular blog, with each blog focusing on a particular metric for assessing the relative strength of case reserves over time. Our blog series provides practical tools to enable you to improve your overall reserving process through a better understanding and analysis of case reserves.

Why should we monitor case reserve adequacy?

Case reserves involve significant judgement. The extent of this judgement depends on the complexity of the claims, the firm’s claims handling policy and processes and a variety of internal and external influences; from operational hiccups to legislative changes.

The adequacy of case reserves is not truly known until claims are fully developed. However, reserving actuaries can’t wait that long. They need to monitor case reserving trends in something closer to real-time to identify any material changes as early as possible and feed these into the overall reserving process.

What does effective case reserve monitoring look like?

Our experience is that discussions about case reserving adequacy can raise sensitivities in the business, especially if there is any perception that “weaker” case reserves mean the claims team are not doing their job well.

Instead, firms should recognise that it is impossible for even the best claims teams to maintain consistent case reserve strength over time. Therefore, the aim is to take a scientific approach to measure the relative strength of case reserves strength over time, and use the measures to help inform the overall reserving estimates.

Given that there is no perfect way of measuring case reserving strength in real-time, we suggest assessing the relative strength of case reserves via several different metrics and viewpoints.  Depending on the circumstances, certain metrics will be more useful than others. 

Next steps

The rest of our blog series will look at each of the most useful metrics in turn, starting with ‘standard’ methods - such as paid to incurred ratios - and progressing to more insightful approaches including development methods and machine learning.

In each instalment, we’ll present the methodology, the practical uses and key implications of each tool. We will focus on how and where the tools are applied and explain how the findings can be combined to enable the most valuable insight into relative case reserving strength.

Later in the series, we will also explore the concept of creating an overall case reserve relative-strength index, as well as combining the metrics with qualitative information from the claims team to create a holistic approach to articulating case reserve adequacy to the business.

We hope you’ll find our series helpful and that many of you will get in touch with your comments on each instalment - we look forward to lots of interesting discussions with you over the coming weeks!