reserve adequacy
One of the main uses of Sch P is determining if reserves are adequate. How is this determined?
1. Is it just looking at part 1 to see if there has been unfavorable development, in which case we can conclude that prior calendar year net ultimate reserves ended up not being adequate?
2. What is the method, using Sch P, to estimate if current CY net reserves are adequate? Is it something like IRIS ratio 13, or is it different than ratio 13 and if so why?
3. If you can also speak to how Sch P can be used to determine if rates are adequate that would also be helpful. Thank you.
Comments
Yes, 1- and 2-year loss eserve development found in Sch P Part 2 give an indication of the adequacy of the past two years' reserves.
Yes, Ratio 13 is used for this. It averages the reserve ratios of the past two years and applies it on the premium of the current year for an indication of required reserves, then compares this to the actual reserves of the current year to determine adequacy.
For rate adequacy, you need to look at the portfolio loss ratio at the current year level. ** This means the ultimate loss ratios by AY of Sch P need to be adjusted for rates-on-level, and frequency, severity and exposure trends. Volatility by AY also needs to be considered. After these adjustments, you compare the resulting loss ratio to the **permissible loss ratio (1 - expense ratio - profit load) to determine rate adequacy.
Most of this information needed to adjust the Sch P los ratios is not available in Sch P or any other part of the Annual Statement.
Trying again,
Yes, 1- and 2-year loss eserve development found in Sch P Part 2 give an indication of the adequacy of the past two years' reserves.
Yes, Ratio 13 is used for this. It averages the reserve ratios of the past two years and applies it on the premium of the current year for an indication of required reserves, then compares this to the actual reserves of the current year to determine adequacy.
For rate adequacy, you need to look at the portfolio loss ratio at the current year level. This means the ultimate loss ratios by AY of Sch P need to be adjusted for rates-on-level, and frequency, severity and exposure trends. Volatility by AY also needs to be considered. After these adjustments, you compare the resulting loss ratio to the permissible loss ratio (1 - expense ratio - profit load) to determine rate adequacy.
Most of this information needed to adjust the Sch P los ratios is not available in Sch P or any other part of the Annual Statement.