Discussion Draft of Proposed Revision to 1988
Statement of Principles Regarding Property and
Casualty Loss and Loss Adjustment Expense
Reserves
May 16, 2005
Phoenix CAS Spring Meeting
Task Force On Reserving Principles
Introduction
CAS Executive Council authorized release of Discussion Draft
of proposed revision to the 1988 Statement of Principles
Regarding Property and Casualty Loss and Loss Adjustment
Expense Reserves. Discussion Draft is result of more than two
years of work by the Task Force on Reserving Principles and its
predecessor, the Committee on Reserves Task Force on
Principles. Members and other interested parties are invited to
participate in the process of articulating these principles by
submitting comments on the Discussion Draft, which is available
for download from CAS Web Site at
http://www.casact.org/research/resddmemo.htm
Discussion Draft reflects
many changes from 1988 Principles

1988 Principles created before Standards of
Practice were promulgated by the Actuarial
Standards Board. 1988 Principles contained
several instances of 'standards-type' concepts
and language.

Discussion Draft addresses this issue by
attempting to restrict document to principles
concepts.
Discussion Draft reflects
many changes from 1988 Principles

Most items included in the 'Considerations'
section of the 1988 Principles are eliminated
since they are deemed to be more properly
classified as standards. Most 'Considerations'
expected to be addressed in the Reserving
Standard currently being drafted by Reserving
Subcommittee of the Casualty Committee of
the Actuarial Standards Board.
Discussion Draft reflects
many changes from 1988 Principles

Uncertainty inherent in estimation of loss reserves given more
emphasis.

Stochastic nature of loss reserving referenced in statistical terms.
Principles rendered more consistent with the draft 'Principles
Underlying Actuarial Science' as well as reflects movement of
CAS towards more statistical framework for loss reserving.

New 'Context' part introduced to emphasize that an actuarially
appropriate loss reserve is a function of context in which it is to
be presented. Concept of 'review date' is added to reflect
information subsequent to valuation date that may be
incorporated into loss reserve estimate
The Discussion Draft reflects
many changes from 1988 Principles

'Definitions' and 'Applications' (renamed from
'Conclusions') parts significantly reworked in attempt to
make document more concise and flow more smoothly.

To further identify changes in the Discussion Draft,
you may wish to refer to the 1988 Statement of
Principles Regarding Property and Casualty Loss and
Loss Adjustment Expense Reserves, which is available
for download at:
http://www.casact.org/standards/princip/sppcloss.pdf
Statement of Principles
Regarding Property and Casualty
Loss and Loss Adjustment Expense
Reserves
DISCUSSION DRAFT
Comment Deadline
May 31, 2005
Task Force on
Reserving Principles
Bertram A. Horowitz, Chairperson
Aaron M. Halpert
Jon W. Michelson
Evelyn Toni Mulder
Dale F. Ogden
David S. Powell
Deborah M. Rosenberg
Rodney E. Kreps, Technical Advisor
Introduction
The purpose of this statement is to identify and describe
principles for the evaluation, review and estimation of property
and casualty loss and loss adjustment expense reserves
(collectively referred to herein as “loss reserves”). Loss reserves
are utilized for a variety of purposes, including financial
reporting, valuation, commutation and ratemaking. This
statement consists of four parts:
I.
II.
III.
IV.
Definitions
Context
Principles
Applications
I. Definitions

Insurer: For the purpose of this statement, an insurer is any risk bearer for property
and casualty exposures, whether an insurance or reinsurance company, self-insured
entity or other.

Loss: The costs related to a claim or a group of claims generally are categorized as
either losses or loss adjustment expenses. Losses are the amounts incurred to
indemnify or compensate claimants, policyholders, and other risk-bearers for their
damages, such as economic losses (e.g., wages, medical bills and rehabilitation
expenses) and non-economic losses (e.g., pain and suffering). Loss adjustment expenses
are the related amounts incurred to investigate, manage, and settle claims and include
such items as fees for attorneys, investigators, appraisers and expert witnesses, and the
salaries and overhead expenses of claims personnel. Any subsequent use of the term
“loss” in this statement refers to losses and/or loss adjustment expenses. Accordingly,
this statement applies to reserves for losses, reserves for loss adjustment expenses and
reserves for both losses and loss adjustment expenses.
I. Definitions

Loss Reserve: A loss reserve is an estimate of the unpaid amounts
required to settle a defined group of claims as of a particular accounting
date.

Defined Group of Claims: It is important to clearly define the group
of claims to which the loss reserve applies. Typically, a group of claims
is defined by the type of exposure (e.g., workers compensation, general
liability or automobile liability) and an applicable exposure period (e.g.,
calendar or fiscal years, quarters, or months) which may be based on the
accident, injury, or occurrence date (the date on which an event occurred
that gives rise to a claim), the report date (the date on which a claim was
reported to the insurer), the policy date (the date on which exposure
began) or the underwriting date (the date on which the treaty, policy or
other contract was underwritten). In defining a group of claims, other
criteria may apply in addition to or instead of those described as typical.
I. Definitions

Accounting Date: The accounting date defines the boundary between
paid losses and the unpaid losses. The loss reserve is an estimate of
those payments that occur subsequent to the accounting date.

Valuation Date: The valuation date is the date through which
transactions are included in the data used in the evaluation of the loss
reserve, regardless of when the analysis is performed.

Review Date: While the accumulation of transactions included in the
database is cut off as of the valuation date, others types of information
affecting the loss reserve (such as changes in statutes, court decisions,
and the status of the insurer) may become available between the
valuation date and the date on which the evaluation, review or estimation
of the loss reserve is completed. The review date is the date through
which such additional information is incorporated into the loss reserve.
I. Definitions

Dates Generally: The various dates defined in this statement are
important to fully describe a loss reserve. Frequently, the accounting
date, the valuation date, the review date, and the date used to define a
group of claims are identical. For example, during January, 2005, one
may be evaluating the liability for all claims with occurrence dates
through December 31, 2004 (the defined group of claims), as of
December 31, 2004 (the accounting date), using data valued as of
December 31, 2004 (the valuation date), and other relevant information
as of December 31, 2004 (the review date). However, it is not
uncommon for the accounting date, the valuation date and the date used
to define the group of claims to occur in any order. The review date
must necessarily occur on or subsequent to the valuation date.

Final Settlement: Final settlement is the ultimate disposition, by any
means, of a claim such that there will be no further payments, recoveries,
or activities related to such claim.
II. Context
The context in which loss reserves are presented may indicate elements
to be reflected in the loss reserves. Depending on the context:
1. loss reserves may reflect the effects of ceded reinsurance or other
ceded exposures, anticipated salvage and subrogation, policyholder
deductibles, self-insured retentions, excess insurance, coinsurance,
coordination of benefits, second injury funds, and other collateral
sources;
2. loss reserves may be stated at nominal value (i.e., estimated without
consideration of investment income to be earned) or at present value in
consideration of anticipated investment income;
II. Context
3. loss reserves may contain a provision to reflect
uncertainty; and
4. loss reserves may reflect the status of the insurer or
reflect the arrangement under which claims are to be
settled. For example, loss reserves may reflect whether
an insurer is an on-going concern, in bankruptcy or
insolvent, in rehabilitation or liquidation, in run-off, in
arbitration or is settling claims under an arrangement
that otherwise impacts the cost of settlement.
III. Principles
1. Actuarially Reasonable Loss Reserve: An actuarially
reasonable loss reserve for a defined group of claims is an
estimate, derived from reasonable assumptions and
appropriate methods, using data as of a given valuation date
and other relevant information as of a given review date, of
the unpaid amounts required to settle all such claims,
whether reported or not, as of a particular accounting date.
2. Probability Distribution Representation: The unpaid
amounts required to settle a defined group of claims can be
represented as a probability distribution for which neither
the form nor the parameters are necessarily known.
III. Principles
3. Inherent Uncertainty: The unpaid amounts required to settle a
defined group of claims are dependent upon events subsequent to the
valuation date and therefore, any loss reserve is inherently uncertain.
The uncertainty in the loss reserve increases as the dispersion of the
corresponding probability distribution increases. Data limitations may
also add to the uncertainty in the loss reserve.
4. Range of Reserves: The uncertainty in the estimate of the unpaid
amounts required to settle a defined group of claims implies that a
range of loss reserves can be actuarially reasonable.
5. Estimated Versus Actual Payments: The estimated future
payments implied by an actuarially reasonable loss reserve likely will
differ from the actual future payments required to settle a defined
group of claims since the actual future payments can be known with
certainty only when all such claims have reached final settlement.
III. Principles
6. Relevant Variables and Circumstances: Actuarially reasonable loss
reserves depend upon a number of relevant variables and circumstances
including data and information regarding underwriting, claims handling,
data processing and accounting as well as the economic, business, legal,
political, and social environments as of the valuation and review dates.
At different valuation or review dates, those variables and circumstances
may have changed. As such, an actuarially reasonable loss reserve as of a
particular accounting date, valuation date, and review date may differ
from an actuarially reasonable loss reserve as of the same accounting
date and a different valuation or review date.
7. Selection of Loss Reserve: The selection of a loss reserve from
within a range of actuarially reasonable loss reserves depends upon the
relative likelihood of the estimates and the context in which the loss
reserve is to be presented.
IV. Applications

Loss Reserving Methods: Detailed discussion of the
technology and applicability of current loss reserving
practices is beyond the scope of this statement.
Selection of appropriate methods is the responsibility
of the individual(s) evaluating, reviewing or estimating
the loss reserves.

Standards of Practice: This statement provides
principles of loss reserving. Relevant Standards of
Practice address the application of these principles.
In review of
Discussion Draft, consider

All feedback, comments, and suggestions are welcome.

While general comments may be submitted, the Task Force
believes that specific alternative wording is especially useful.

Your suggestions to a particular section may impact other
parts of the Discussion Draft, therefore it may be necessary
to incorporate your changes throughout the document.

Please send your written comments via e-mail by May 31,
2005 to Mike Boa at the CAS Office (mboa@casact.org), who
is compiling the comments on behalf of the Task Force.