Processing math: 100%
Korn, Uri. 2022. “A Behavioral Approach to Understanding Loss Reserves.” CAS E-Forum Summer (September).
Download all (25)
  • Table 1. Data Properties
  • Table 2. R Values and Initial Biases
  • Table 3. A Comparison of Reserving Errors
  • Table 4. “Optimal” R Values
  • Table 5. Generalized Cape Cod Exponential Decay Values
  • Table 6. Errors from Generalize Cape Cod Method (in Thousands)
  • Figure 1. Average Initial Bias by Line of Business Percentage
  • Figure 2. Average R Value by Line of Business Percentage
  • Figure 3. Average Initial Bias by Company Size
  • Figure 4. Average R Value by Company Size
  • Table 7. Regression Values
  • Figure 5. A comparison of mutual and non-mutual companies
  • Table 8. “Optimal” R Values
  • Table 9. Implied Relative Costs
  • Table B1. R Values for Booked Reserves
  • Table B2. R Values for Most Accurate Reserves
  • Table B3. Loss Ratio Biases (Percentages)
  • Table C1. WC by Size Group
  • Table C2. GL by Size Group
  • Table C3. AL by Size Group
  • Table C4. FL by Size Group
  • Table C5. WC by Percentage Group
  • Table C6. GL by Percentage Group
  • Table C7. AL by Percentage Group
  • Table C8. FL by Percentage Group

Abstract

This paper takes a deep dive into historical loss reserves. Using Schedule P company filings, it is shown that reserves are very slow to react to emerging losses, much slower than the most accurate approach would dictate. There are other concerns besides accuracy, such as stability and avoiding deficient reserves. But attempting to explain the discrepancy in this manner alone would require a level of risk aversion that is unrealistic. Instead, it is shown that the corporate environment causes increased conservatism, and when coupled with narrow framing is able to explain company practice.

Accepted: August 26, 2022 EDT