Where reserve development is the current year adjustment to the prior year’s reserve. Inferences made using this ratio are typically based on its time series properties such as the average value, trend or standard deviation over recent years.
The primary expense recognized by PC insurers is losses and loss expenses. Measuring this expense involves significant uncertainty and discretion which often results in a large measurement error. Over time as losses are paid and new information is obtained insurers revise the estimate of total incurred losses and this adjustment called reserve development; it is included in the reported losses and loss expenses. Because the adjustment is both unrelated to current coverage and quite volatile, some analysts exclude it from the losses and loss expenses when analyzing underwriting profitability.
This ratio is measured as follows:
Still considering the time series properties of the reserve development ratio is informative. To the extent that measurement error in loss reserving is correlated over time, past adjustments to the loss reserve inform on the precision of the reported cost of current coverage. Compared to other insurers an insurer with a sequence of positive adjustments to the reserve may be more likely to understate the losses and loss expenses associated with current coverage and an insurer with a history of large adjustments may be more likely to have large error in the reported cost of current coverage. Moreover even if loss recognition for current coverage is adequate to the extent that adjustments of inadequate past reserves are applied gradually, examining the time series of the reserve development ratio may help predict future development with respect to past coverage which will be included in the future reported losses and loss expenses.
The reserve development ratio can be calculated using either information from the Loss Reserve Development schedule or from the footnote disclosure of the Reconciliation of Claim and Claim Adjustment Expense Reserves.
The primary expense recognized by PC insurers is losses and loss expenses. Measuring this expense involves significant uncertainty and discretion which often results in a large measurement error. Over time as losses are paid and new information is obtained insurers revise the estimate of total incurred losses and this adjustment called reserve development; it is included in the reported losses and loss expenses. Because the adjustment is both unrelated to current coverage and quite volatile, some analysts exclude it from the losses and loss expenses when analyzing underwriting profitability.
This ratio is measured as follows:
The reserve development ratio can be calculated using either information from the Loss Reserve Development schedule or from the footnote disclosure of the Reconciliation of Claim and Claim Adjustment Expense Reserves.