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Free Study Materials for the Casualty Actuarial Society (CAS) Exam 5B 

(Old Exam 6)

Actuarial Reserving Considerations: Practice Questions and Solutions

This section is part of Mr. Stolyarov's Free Study Materials for the CAS Exam 5B.

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of the Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5B (Old Exam 6). Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Casualty Actuarial Society, Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves, May 1988. pp. 15-19.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S6-9-1. According to the Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves (hereafter, Statement of Principles), is it generally accepted to have the provision for reopened claims included in (i) the reserve for known claims or (ii) the IBNR reserve? Why? Under what situations might the practice that is not generally accepted arise?

Solution S6-9-1. It is generally accepted that the provision for reopened claims should be included in the reserve for known claims. This is because reopened claims are generated from claims that have been previously reported and are thus known at the time the reserve estimate is being made. But if an insurer's practices require establishing a new report date for a reopened claim, then the provision for reopened claims would be considered a part of the IBNR reserve (Statement of Principles, p. 15).

Problem S6-9-2.

(a) Give three examples of how data might be separated in order to achieve homogeneous groupings (Statement of Principles, p. 15).

(b) How might there be a tradeoff between homogeneity and credibility?

Solution S6-9-2.

(a) The following examples of how data might be separated in order to achieve homogeneous groupings are given on pp. 15-16 of the Statement of Principles:
1. For heterogeneous products like commercial multi-peril insurance, separating data by coverage type
2. Separating data for personal risks from data for commercial risks
3. Separating primary coverage data from excess coverage data
4. Separating data before an operational or procedural change from data after such a change
5. Separating data on claims-made policies from data on occurrence-based policies
Any three of the above suffice as an answer. Other valid answers may also be possible.

(b) The pursuit of complete homogeneity may require data to be separated into groups in each of which the amount of data is quite small. The experience within such small homogeneous groups may not be sufficient to make valid generalizations about each group, implying a lack of credibility.

Problem S6-9-3.

(a) According to the Statement of Principles (p. 15), with what must data reconcile when used for the analysis of reserves?

(b) How do emergence patterns typically differ between property claims and liability claims?

(c) What effect should be removed in order to evaluate development patterns correctly (Statement of Principles, p. 16)?

Solution S6-9-3.

(a) Data used for analysis of reserves must reconcile with the insurer's financial records (Statement of Principles, p. 15).

(b) Property claims are typically reported much more quickly than liability claims.

(c) The effect of discounting should be removed in order to evaluate development patterns correctly. If a reserve is established as a present value of future costs, then upward development may occur simply as a result of paying claims, and this may send a misleading signal.

Problem S6-9-4.

(a) According to the Statement of Principles (p. 17), what is one difference between reserving based on GAAP (Generally Accepted Accounting Principles) and reserving based on SAP (Statutory Accounting Principles)? How should insurers accommodate this difference?

(b) Name four kinds of external influences that would have an impact on reserving decisions (Statement of Principles, p. 18).

Solution S6-9-4.

(a) SAP reserves generally may not include deductions for anticipated salvage and subrogation recoveries, whereas GAAP reserves are typically reduced by these anticipated recoveries. According to the Statement of Principles, insurers should evaluate the estimated impact of such recoveries even though it may not, by law, be applicable to all officially reported reserves.

(b) The following external influences would have an impact on reserving decisions:
1. Regulatory changes
2. Judicial decisions and environment
3. Legislative changes
4. Residual/involuntary market mechanisms
5. Macroeconomic variables, such as inflation
Any four of the above suffice as an answer. Other valid answers may also be possible.

Problem S6-9-5.

(a) How might a reserve estimate account for the uncertainty inherent in reserve projections (Statement of Principles, p. 18)?

(b) Name four other loss-related balance sheet items for which loss reserve analysis might have implications (Statement of Principles, p. 18).

Solution S6-9-5.

(a) A reserve estimate might account for the uncertainty inherent in reserve projections by including (1) "a implicit provision for uncertainty due to the time value of money" or (2) "an explicit provision for uncertainty in the undiscounted amount" when there is a high degree of volatility.

(b) The following are other loss-related balance sheet items for which loss reserve analysis might have implications (Statement of Principles, p. 18):
1. Contingent commissions
2. Retrospective premium adjustments
3. Policyholder dividends
4. Premium deficiency reserves
5. Minimum statutory reserves
6. Deduction for unauthorized reinsurance
Any four of the above suffice as an answer. Other valid answers may also be possible.

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