5 - Reserving in Practice

Summary

Introduction

The main purpose of this chapter is to summarise a number of key generic aspects of reserving in practice. It is designed mainly for the practitioner who is new or relatively new to reserving, although some of the content may also be helpful to more experienced practitioners when they are reviewing their overall reserving process.

This chapter builds on the various other practical aspects of reserving covered in other chapters. For example, some of the practical details of applying specific reserving methods are covered in Chapters 3 and 4 for deterministic and stochastic methods respectively. Chapter 6 also covers a number of reserving topics that may be relevant to applying methods in practice, such as the use of Actual vs Expected methodology and discounting.

Inevitably, in any reserving exercise there will be points of detail that depend, for example, on the nature of the business being analysed and the purpose of the exercise. Chapter 7 summarises some of this detail for a selected range of specific contexts, such as UK Motor and US Workers’ Compensation.

Hence, many of the chapters have material which is relevant to reserving in practice. Together, this content refers to the “art” of reserving, to supplement the other parts of the book, which focus more on the “science” of reserving; reserving work in practice will typically involve both of these aspects.

In Chapter 1, a reserving exercise was summarised as having four key stages – Background, Data, Analysis and Reporting–with brief details being provided on each of these stages. The current chapter provides some additional practical details of selected aspects of each of these stages. The first two stages – Background and Data – have already been covered in earlier chapters in sufficient detail, so this chapter only includes relevant additional points, to help put these stages in the context of the overall reserving process. The Analysis stage is covered in several sections, relating to various aspects of this stage of the process, which forms the core of most reserving exercises.

The focus in this chapter is on using deterministic methods to derive a point estimate of the reserves, for example, for financial reporting purposes.