Loss Reserving: A Fresh Look

Property/casualty industry loss and loss adjustment expense reserves totaled $537.5 billion as of March 31 -- $21.9 billion more than the industry's statutory surplus at the time. But loss reserves are merely estimates of the amounts that will ultimately be paid to settle claims, with all the uncertainty inherent in estimates. A.M. Best's recent study of 1,023 property/casualty insurance company failures from 1969 to 2007 attributed 38.1% of those failures to inadequate loss reserves -- more than the next three most frequent causes combined. Reserve strengthening then eliminated deficiencies, with reserves being potentially redundant by about 5% at year-end 2006. Traditional loss reserving suffers from several shortcomings that can now be addressed.