Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Liabilities

Abstract

The purpose of this statement is to provide general guidelines for the use of actuaries engaged in the establishment and review of loss and loss adjustment expense reserves. It is a statement of the Casualty Actuarial Society's Committee on loss Reserves. The statement consists of three parts.1. Definitions2. Considerations3. ProceduresThe balance sheet of the Fire and Casualty Annual Statement includes liabilities that are not subject to precise valuation. The reserves for unpaid losses (line 1, page 3 of the Annual Statement) and the reserve for unpaid loss adjustment expense (line 2, page 3 of the Annual Statement) cannot be precisely determined in advance. These reserves must be estimated. Because of their relative size and the difficulty in achieving accurate estimates of their values, these liabilities are vitally important balance sheet items. It is important that proper actuarial and statistical procedures be employed in order to improve the likelihood of reliable reserve estimates. Without reliable reserve estimates, an accurate evaluation of the financial condition of a fire and casualty insurer cannot be accomplished.Loss reserving involves the current financial evaluation of costs associated with future contingent events, a matter of fundamental interest to actuaries. The contingencies involved are those factors which affect the cost of future payments on insured events which have already occurred. As ratemaking is another application of the same estimating process, the actuarial methodology is similar in many respects.The definitions in the next section apply to both loss reserves and loss adjustment expense reserves.For the purpose of this statement the terms “loss” and “claim” will be used interchangeably.