9. Claims Reserving, Financial Control and Recoveries

Introduction and context

Claims reserving is the process through which an insurer estimates the amount required to meet future payments arising from insured events that have already occurred. It is one of the most important financial and managerial functions in insurance because premium income is received before the final cost of claims is known. Between the occurrence of a loss and its ultimate settlement, information develops progressively. Some claims are reported promptly, some are reported late, and even reported claims may be settled only after investigation, negotiation, litigation or the completion of repairs.

A reserve is therefore not simply an accounting entry. It is an estimate of an uncertain future cash outflow. Inadequate reserves can produce overstated profits, weak solvency, inappropriate pricing decisions and delayed recognition of adverse experience. Excessive reserves may suppress current profit, distort performance measurement and create misleading impressions about future profitability. Effective claims reserving must consequently combine claims expertise, actuarial analysis, financial control, data governance and professional judgement.

Recoveries are the other side of the claims-cost equation. Salvage, subrogation, contribution and reinsurance recoveries reduce the insurer’s net cost, but they also involve uncertainty, legal rights, documentation and timing. A sound claims-financial framework must estimate both gross liabilities and expected recoveries without allowing uncertain recoveries to conceal inadequate gross reserves.

Learning objectives

After studying this chapter, the reader should be able to:

1. Distinguish case reserves, IBNR, incurred claims, paid claims and ultimate losses.

2. Explain the relationship between claims development, reserving and financial control.

3. Apply loss-development and chain-ladder methods to estimate ultimate losses.

4. Explain the Bornhuetter–Ferguson and scenario-based approaches and identify when they are appropriate.

5. Evaluate reserve adequacy, reserve deterioration and claims leakage.

6. Explain the management of salvage, subrogation, contribution and reinsurance recoveries.

7. Interpret the governance, ethical and technological issues associated with reserving.

8. Make informed managerial decisions when reserve estimates are uncertain.

The anatomy of an insurance liability

The claims liability at a reporting date can be viewed as the expected ultimate cost of all covered events that have occurred up to that date, less amounts already paid. The ultimate loss includes indemnity payments, defence costs, investigation expenses, medical costs, adjustment expenses and other claim-related amounts, depending on the applicable accounting and regulatory framework.

A useful conceptual relationship is:

Ultimate loss = Paid loss to date + Outstanding reported loss + IBNR loss.

The expression is simplified because some systems separately identify allocated loss-adjustment expenses, unallocated expenses and expected recoveries. Nevertheless, it clarifies the central task: the insurer must estimate the final cost of claims before that cost is fully observable.

A case reserve is an estimate established for an individual reported claim. It may be created by a claims handler, an automated system or an expert assessor. The reserve should reflect the current facts, policy coverage, liability assessment, probable settlement value and likely expenses. Case reserves are revised as new information emerges.

Incurred but not reported (IBNR) refers to losses from insured events that have occurred but have not yet been reported to the insurer. In broader actuarial usage, IBNR may also include development on reported claims when a method estimates total incurred claims rather than only strictly unreported claims. For clarity, many practitioners distinguish pure IBNR from IBNER, meaning incurred but not enough reported or future development on known claims.

Incurred claims normally comprise paid claims plus outstanding reserves. Reported but not settled (RBNS) claims are known claims for which payment remains outstanding. Ultimate loss is the final expected cost when all claims in an accident or underwriting period have been fully settled. The difference between ultimate loss and amounts already paid is the outstanding claims liability before considering relevant recoveries.

The timing basis is also important. An accident year groups claims by the year in which the insured event occurred. A policy year groups claims by the year in which the policy was written. A report year groups claims by the year in which they were notified. Accident-year analysis is often preferred for reserving because it aligns claims with the period of risk exposure, although the appropriate basis depends on the product and data quality.

Reserving data and development patterns

Claims reserving commonly uses a development triangle. The rows represent origin periods, such as accident years, while the columns represent development ages, such as 12, 24 and 36 months. The cells contain cumulative paid claims, cumulative incurred claims, claim counts or other measures. A paid triangle records amounts actually paid; an incurred triangle generally records paid amounts plus case reserves.

For example, a cumulative paid triangle may appear as follows:

| Accident year | 12 months | 24 months | 36 months |

|---|---:|---:|---:|

| 2021 | 400 | 620 | 700 |

| 2022 | 450 | 690 | — |

| 2023 | 520 | — | — |

The movement from one development age to the next is represented by a link ratio or age-to-age factor. If 2021 paid claims increase from 400 to 620, the factor is 1.55. Link ratios are selected using historical experience, weighted averages, medians, trimmed averages or professional judgement.

Development patterns may be affected by reporting speed, court processes, inflation, claim settlement practices, changes in deductibles, policy limits, reserving policies, claims handling systems and changes in the mix of business. A factor is therefore not a purely mechanical property of a line of business. It is an interpretation of operational and economic behaviour.

Loss-development and chain-ladder methods

The loss-development method begins with observed cumulative losses and projects them to an ultimate value using selected development factors. The chain-ladder method is the most familiar form. Historical age-to-age factors are selected and multiplied to obtain cumulative development factors (CDFs). The CDF from a particular valuation age to ultimate estimates how much the loss is expected to grow after that age.

Suppose the selected 12-to-24-month factor is 1.50 and the 24-to-36-month factor is 1.10. The 12-month-to-ultimate CDF is:

1.50 × 1.10 = 1.65.

If the 2023 accident year has cumulative incurred claims of 520 at 12 months, its projected ultimate incurred loss is:

520 × 1.65 = 858.

The implied reserve is 858 less the incurred amount already recorded, subject to the precise treatment of paid and case reserves. If using a paid triangle, the result estimates ultimate paid loss and the outstanding liability is ultimate paid loss less paid-to-date.

The chain-ladder method is attractive because it is transparent, reproducible and grounded in the insurer’s own claims development. It is especially useful where a stable volume of credible historical data exists and the future is expected to resemble the past. However, it assumes that historical development patterns remain relevant. This assumption may fail when a claims system changes, inflation accelerates, a legal decision alters liability, claims handling is reorganised or a portfolio is materially underwritten differently.

Selection of development factors requires judgement. A simple average may give undue weight to unusual years. A volume-weighted average may be more stable where claim sizes vary. A recent-period selection may reflect current practice better but may be less credible. The actuary or reserving committee should examine both statistical indications and operational explanations rather than selecting factors solely to achieve a desired profit result.

Bornhuetter–Ferguson and the role of prior expectations

The Bornhuetter–Ferguson (BF) method combines an expected ultimate loss with the proportion of loss that has emerged by the valuation date. It is particularly useful for immature accident years, new products and portfolios where early observed claims are too volatile to support a pure chain-ladder projection.

The method can be expressed as:

BF ultimate loss = observed loss to date + expected unreported portion.

If the expected ultimate loss is 1,000 and the selected development factor at the current age is 2.00, the expected proportion reported is 1/2, or 50%. If observed incurred loss is 480, the BF estimate adds 50% of the expected ultimate, or 500, to the observed amount. The indicated ultimate is therefore 980.

The BF method gives less weight to random early claims experience than the chain-ladder method. Its strength is stability when actual early experience is noisy. Its weakness is dependence on the expected loss ratio or other prior expectation. If the prior expectation is wrong because pricing, exposure, inflation or underwriting quality has changed, the result may be biased.

A practical reserving exercise often compares chain-ladder, BF and other methods. Material differences should not be averaged automatically. They should prompt investigation. A chain-ladder estimate much higher than BF may indicate adverse experience, unusually rapid reporting or an inappropriate prior expectation. A lower chain-ladder result may reflect favourable experience, delayed reporting or inadequate case reserving.

Scenario methods and uncertainty

A single point estimate can create false precision. Scenario methods address uncertainty by modelling plausible alternative futures. A reserving team may construct central, favourable and adverse scenarios involving different assumptions about claim frequency, severity, inflation, settlement speed, litigation, large losses and recoveries.

For example, a liability portfolio may have a central ultimate estimate of 12 million. A favourable scenario could assume faster settlement and lower legal inflation, producing 10.8 million. An adverse scenario could assume delayed court resolution, higher medical inflation and additional large claims, producing 14.5 million. The scenarios are not necessarily statistical confidence limits; they are structured management views of potential outcomes.

Scenario analysis is valuable for capital planning, reinsurance decisions, stress testing and risk appetite. It also improves communication with boards and audit committees. A credible scenario framework documents assumptions, identifies the drivers of variance and distinguishes model uncertainty from process uncertainty. Sensitivity testing can show the effect of changing one assumption at a time, while stochastic models may generate a distribution of possible outcomes where data and expertise justify their use.

Reserve adequacy and financial control

Reserve adequacy is assessed by comparing the booked liability with a technically sound estimate of ultimate obligations, allowing for uncertainty and applicable accounting requirements. The objective is neither deliberate conservatism nor profit smoothing. It is faithful representation of the insurer’s obligations.

A robust control framework includes:

• defined reserving policies and approval authorities;
• reconciliation between claims systems, general ledger and actuarial data;
• documented case-reserving standards;
• independent review of assumptions and methods;
• controls over large losses, reopened claims and claims without movement;
• regular back-testing of prior estimates against actual development;
• separate monitoring of gross claims and recoveries; and
• clear escalation of material adverse development.

Reserve development analysis compares an earlier estimate of ultimate loss with later knowledge. If a 2022 accident-year estimate was 8 million and subsequent development indicates 9.2 million, the adverse development is 1.2 million. Repeated adverse development may indicate systematic under-reserving, claims leakage, optimistic assumptions, inadequate case reserves or emerging external risks.

Financial control also requires disciplined treatment of claim payments. Duplicate payments, payments outside authority, unsupported vendor invoices, incorrect policy limits and failure to apply deductibles are common sources of leakage. Controls should be designed around the entire claim lifecycle rather than only the final accounting entry.

Claims leakage and operational discipline

Claims leakage is the avoidable difference between the amount that should have been paid under the policy and the amount actually paid. It may result from fraud, error, poor negotiation, weak supplier management, missed deductibles, incorrect coverage interpretation, failure to pursue recoveries or delayed intervention in litigated claims.

Leakage is not eliminated by reducing every payment. An unjustified denial or underpayment creates regulatory, legal and reputational risk. Effective leakage management uses sampling, root-cause analysis and process redesign. Useful indicators include average settlement variance, reopened-claim frequency, percentage of claims exceeding authority limits, recovery conversion rates, vendor price variance and the age profile of outstanding claims.

Claims handlers need authority appropriate to their role, but authority must be supported by clear documentation and post-payment review. Automated alerts can identify unusual claim patterns, while expert review remains essential for complex bodily injury, liability and catastrophe claims.

Recoveries: reducing net cost without overstating value

Recoveries should be recognised only to the extent that the insurer has a valid right and the amount and timing are reasonably supportable. Expected recoveries must not be used to disguise an inadequate gross claims reserve. Management should therefore report gross incurred loss, gross outstanding liability, recoveries and net liability separately.

Salvage

Salvage is the value obtained from damaged insured property after a claim has been paid or settled. In motor insurance, a damaged vehicle may be sold to a salvage operator. In marine or property insurance, damaged goods or equipment may retain residual value. The insurer should establish title or contractual rights, obtain reliable valuations, control disposal and record the proceeds accurately. Delayed disposal can reduce value through deterioration, storage charges or market changes.

Subrogation

Subrogation is the insurer’s right, after indemnifying the insured, to pursue a responsible third party. For example, an insurer that pays for damage caused by a negligent contractor may seek recovery from that contractor or its liability insurer. Successful subrogation requires evidence of liability, preservation of documents, timely notice, limitation-date control and coordination with the insured.

The insurer must avoid prejudicing the insured’s rights and must consider policy conditions, local law and the insured’s uninsured losses. Subrogation strategy should be proportionate: pursuing a small uncertain recovery at excessive legal cost may destroy economic value.

Contribution

Contribution arises where more than one insurer covers the same interest, peril and loss, subject to applicable legal rules and policy terms. The insurers share the loss according to their respective obligations rather than allowing the insured to recover more than the indemnifiable loss. Claims teams must identify other insurance through proposal forms, policy records, broker information and targeted investigation. Contribution disputes often arise from differences in primary, excess, escape or non-contribution clauses.

Reinsurance recoveries

Reinsurance transfers part of the insurer’s risk to a reinsurer. Recoveries may arise under quota-share, surplus, excess-of-loss, catastrophe or other arrangements. The calculation depends on attachment points, limits, reinstatements, exclusions, hours clauses, event definitions, aggregate protections and claims cooperation provisions.

A cedant must maintain accurate bordereaux, claim notices, contract records and allocation methodologies. Recoverables should be reconciled to ceded premium, paid losses, case reserves, IBNR and cash received. Counterparty credit risk is significant: a technically valid recovery may not be fully collectible if the reinsurer is financially distressed or disputes coverage. Collateral, security arrangements and overdue-recovery monitoring are therefore important components of financial control.

An integrated reserving workflow

A practical annual or quarterly reserving cycle usually begins with data extraction and reconciliation. Claims data are checked for missing origin periods, duplicate records, unusual movements, currency inconsistencies and changes in coding. The reserving team then segments the portfolio into reasonably homogeneous classes. Excessive aggregation can conceal different development patterns; excessive fragmentation can produce unstable estimates.

Next, the team reviews exposure, claims frequency, severity, large losses, inflation, legal developments, operational changes and reinsurance terms. Paid and incurred triangles are prepared, development factors selected and alternative methods applied. Results are compared with case-reserve adequacy reviews and claims-handler intelligence.

The proposed reserve is then challenged through peer review, sensitivity testing and governance committees. Material differences between actuarial indications and management’s proposed booking require documented rationale. After approval, the reserve is posted to the ledger, recoveries are recorded separately and management reports explain movements from the previous period.

Illustrative case study: the Northstar liability portfolio

Background

Northstar Insurance writes commercial liability business. At the end of 2024, the 2024 accident year has cumulative incurred claims of 6.4 million at 12 months. Historical development analysis suggests a 12-month-to-ultimate factor of 1.55. The portfolio has recently experienced higher legal costs and a change in claims-handler staffing.

Situation and problem

The chain-ladder indication is 9.92 million, calculated as 6.4 × 1.55. However, the current year contains several early-reported severe claims, and management believes that historical factors may overstate the future development of ordinary claims. The prior expected ultimate loss based on exposure and pricing analysis is 8.8 million. The selected BF reported proportion is 1/1.55, or approximately 64.5%.

Analysis

The BF estimate is calculated as observed incurred loss plus the expected unreported portion:

Expected unreported proportion = 1 − 0.645 = 0.355.

Expected unreported loss = 8.8 × 0.355 = approximately 3.12 million.

BF ultimate estimate = 6.4 + 3.12 = approximately 9.52 million.

The chain-ladder estimate of 9.92 million is higher, reflecting the strong early development. A review identifies that two large claims account for much of the difference and that legal inflation has increased. The claims team also identifies possible subrogation of 0.35 million and a quota-share reinsurance recovery on covered losses.

Approach and solution

The reserving committee does not select the lower estimate simply because it improves reported profit. It separates ordinary claims from the two large claims, reviews each large claim individually, and uses a BF approach for the immature ordinary portfolio. It selects a central gross ultimate estimate of 9.7 million, with a favourable scenario of 9.2 million and an adverse scenario of 10.8 million. The committee books the gross liability on a documented basis and records only the portion of subrogation and reinsurance recoveries that is sufficiently supported and collectible.

A financial-control review is also initiated. It tests authority compliance, legal-cost invoices, duplicate payments, the status of subrogation evidence and reinsurance notifications. The board report explains that the reserve increased because of legal inflation and large-claim uncertainty, not merely because of a change in actuarial technique.

Outcome

Northstar obtains a more credible estimate than either mechanically adopting the chain-ladder result or relying on management optimism. The scenario range is incorporated into capital planning. Recovery actions are assigned to named owners, and future reviews will compare actual development with the selected estimate.

Learning points

The case demonstrates that reserving is a process of informed estimation. Models provide indications, but segmentation, large-loss review, operational evidence, recovery collectibility and governance determine the quality of the final decision. Gross liabilities and recoveries must be analysed independently, and uncertainty should be communicated rather than concealed.

Challenges, limitations and common mistakes

The principal limitation of development methods is their dependence on historical patterns. Structural change can make past factors unreliable. Other difficulties include sparse data for new products, long-tail claims, inconsistent case-reserve practices, inflation, claims cannibalisation, social inflation, changing court behaviour and the treatment of catastrophes.

Common mistakes include:

• applying one development factor to materially different claim segments;
• selecting factors without investigating outliers;
• treating case reserves as objective facts rather than estimates;
• confusing pure IBNR with total development on reported claims;
• booking recoveries before rights or collectibility are established;
• ignoring claim expenses and currency effects;
• failing to reconcile actuarial data to the ledger;
• using reserve releases to meet earnings targets; and
• reporting a point estimate without explaining uncertainty.

Governance, ethics and regulation

Reserving involves conflicts of interest because estimates affect profit, bonuses, capital and managerial reputation. Professional integrity requires that assumptions be evidence-based, documented and capable of independent challenge. Deliberately understating liabilities, delaying recognition of adverse information or overstating recoveries can mislead policyholders, investors, regulators and reinsurers.

Governance should define the responsibilities of claims management, actuarial functions, finance, risk management, internal audit and the board. Material model changes should be approved and disclosed appropriately. Confidential claims data must be protected, and personal information should be accessed only for legitimate purposes. Regulatory requirements vary by jurisdiction, but commonly address technical provisions, solvency, valuation, recoverable assets, data quality and reporting controls.

Technology, analytics and emerging practice

Modern claims platforms integrate policy, claim, payment, reserve and recovery data. Automated development triangles, workflow controls and reconciliation tools reduce manual error. Predictive analytics can estimate claim severity, litigation propensity, settlement time and fraud indicators. Machine-learning models may assist case reserving, but they require validation, monitoring for drift, explainability and controls against unfair outcomes.

Artificial intelligence should support rather than replace professional accountability. A model trained on historically low reserves may reproduce past under-reserving. Similarly, automated settlement recommendations can disadvantage vulnerable claimants if data or design is biased. Human review remains necessary for exceptional, disputed or high-severity claims.

Emerging practice includes real-time reserving, probabilistic forecasts, climate-related scenario analysis, granular inflation models, automated recovery matching and stronger integration of claims data with enterprise risk management. These developments increase analytical power but also make data lineage, cybersecurity and model governance more important.

Best-practice principles

A mature reserving and recovery function should:

1. maintain clear definitions and consistent valuation bases;

2. reconcile claims, actuarial and financial records;

3. use multiple methods where uncertainty is material;

4. segment portfolios according to risk and development behaviour;

5. combine quantitative indications with informed claims judgement;

6. review large, reopened and dormant claims separately;

7. analyse gross liabilities before recoveries;

8. monitor recovery rights, ageing and counterparty credit risk;

9. back-test estimates and investigate adverse development;

10. document assumptions, approvals, overrides and uncertainties; and

11. use technology with appropriate human, ethical and model controls.

Chapter Summary

Claims reserving estimates the future cost of insured events that have already occurred. Case reserves relate to individual reported claims, while IBNR and IBNER capture unreported losses and future development. Development triangles and chain-ladder methods project observed experience using historical patterns; Bornhuetter–Ferguson combines observed losses with prior expectations and is often useful for immature or volatile portfolios. Scenario analysis communicates uncertainty and supports capital and risk decisions.

Reserve adequacy depends on sound data, appropriate segmentation, claims expertise, independent challenge and reconciliation to financial records. Claims leakage can arise from error, fraud, weak authority controls or missed recoveries. Salvage, subrogation, contribution and reinsurance recoveries reduce net cost but must be supported by valid rights, reliable valuation and collectibility assessment. Ethical governance requires unbiased estimation and prohibits profit-driven manipulation. Digital analytics can improve speed and insight, but model validation, explainability, privacy and human accountability remain essential.

Key Terms

Case reserve: An estimate of the remaining cost of an individual reported claim.

IBNR: Losses arising from events that have occurred but have not yet been reported, often used broadly for unreported or undeveloped liabilities.

IBNER: Future development on claims already reported but not fully developed.

RBNS: Reported but not settled claims outstanding at a valuation date.

Ultimate loss: The final total cost expected when all claims from an origin period are settled.

Accident year: The period in which the insured event occurred.

Development triangle: A table showing claims experience by origin period and development age.

Link ratio: The factor describing movement from one development age to the next.

Cumulative development factor: The factor used to project losses from a valuation age to ultimate.

Chain-ladder method: A reserving method that projects observed losses using selected historical development factors.

Bornhuetter–Ferguson method: A method combining observed losses with an expected ultimate loss and an expected emergence pattern.

Scenario analysis: Estimation of outcomes under specified favourable, central and adverse assumptions.

Reserve adequacy: The extent to which booked reserves reasonably cover expected obligations.

Claims leakage: Avoidable overpayment or cost arising from error, fraud, weak controls or missed recovery opportunities.

Salvage: Value recovered from damaged insured property.

Subrogation: The insurer’s right to recover from a responsible third party after indemnifying the insured.

Contribution: Sharing of an insured loss among insurers covering the same interest and peril.

Reinsurance recovery: Amount recoverable from a reinsurer under a reinsurance contract.

Recoverable credit risk: The risk that an expected recovery will be delayed, disputed or not collected.

Reserve development: The change in an earlier estimate of ultimate loss as claims information matures.

Review Questions

Short Answer Questions

1. Distinguish between a case reserve, IBNR and ultimate loss.

2. What is the purpose of a claims development triangle?

3. State the principal difference between chain-ladder and Bornhuetter–Ferguson methods.

4. Define claims leakage and give two examples.

5. Why should gross claims liabilities and recoveries be reported separately?

Long Answer Questions

1. Explain the chain-ladder method, including link ratios, cumulative development factors and its principal assumptions.

2. Discuss the advantages and limitations of the Bornhuetter–Ferguson method in immature portfolios.

3. Describe an integrated reserving workflow from data extraction through governance approval.

4. Explain the financial-control requirements for salvage, subrogation, contribution and reinsurance recoveries.

5. Examine the ethical, regulatory and model-governance issues involved in claims reserving.

Analytical / Application Questions

1. A portfolio has incurred claims of 520 at 12 months and a selected 12-month-to-ultimate factor of 1.65. Calculate the chain-ladder ultimate estimate and explain two reasons why management might not book it automatically.

2. An insurer’s chain-ladder estimate is materially higher than its BF estimate. Identify possible operational and statistical explanations and propose investigations.

3. Design a central, favourable and adverse reserving scenario for a long-tail liability portfolio affected by legal inflation, delayed settlement and uncertain reinsurance recoveries.

22. Multiple Choice Questions with Answers

Question 1

Which statement best describes IBNR in claims reserving?

A. Amounts already paid on reported claims

B. Losses from events that have occurred but have not yet been reported, often including undeveloped liabilities in broad usage

C. Only salvage proceeds received by the insurer

D. Premiums expected from future policies

Correct Answer: B. Losses from events that have occurred but have not yet been reported, often including undeveloped liabilities in broad usage

Question 2

A cumulative loss at 12 months is 520 and the selected 12-month-to-ultimate development factor is 1.65. What is the chain-ladder ultimate estimate?

A. 315.15

B. 520.00

C. 858.00

D. 1,040.00

Correct Answer: C. 858.00

Question 3

Why is the Bornhuetter–Ferguson method often useful for immature accident years?

A. It ignores all prior expectations

B. It gives no consideration to development patterns

C. It reduces reliance on volatile early observed claims by incorporating an expected ultimate loss

D. It guarantees the lowest possible reserve

Correct Answer: C. It reduces reliance on volatile early observed claims by incorporating an expected ultimate loss

Question 4

If the selected 12-month-to-ultimate development factor is 2.00, the expected proportion of ultimate loss reported at 12 months is approximately:

A. 25%

B. 50%

C. 75%

D. 100%

Correct Answer: B. 50%

Question 5

Which situation is most likely to make historical chain-ladder factors unreliable?

A. Stable claims handling and consistent exposure

B. A major change in claims systems and settlement practice

C. A fully reconciled data set

D. A portfolio with consistent development patterns

Correct Answer: B. A major change in claims systems and settlement practice

Question 6

An insurer pays an insured for damage caused by a negligent contractor and then pursues the contractor. This recovery action is called:

A. Contribution

B. Salvage

C. Subrogation

D. Quota share

Correct Answer: C. Subrogation

Question 7

What is the principal financial-control reason for analysing recoveries separately from gross claims liabilities?

A. Recoveries are always certain

B. Recoveries can be uncertain or uncollectible and should not conceal inadequate gross reserves

C. Gross liabilities are not relevant to solvency

D. Recoveries eliminate the need for case reserves

Correct Answer: B. Recoveries can be uncertain or uncollectible and should not conceal inadequate gross reserves

Question 8

Which is an example of claims leakage?

A. A documented payment within policy authority

B. A valid recovery from a reinsurer

C. Failure to apply an applicable deductible, resulting in overpayment

D. A properly reviewed large-loss reserve

Correct Answer: C. Failure to apply an applicable deductible, resulting in overpayment

Question 9

In scenario analysis, an adverse scenario is primarily intended to:

A. Replace all central estimates with guaranteed worst-case outcomes

B. Explore a plausible unfavourable development of claims and assumptions

C. Remove uncertainty from the reserving process

D. Record only paid claims

Correct Answer: B. Explore a plausible unfavourable development of claims and assumptions

Question 10

Which control most directly supports the reliability of reserving information?

A. Posting reserves without reconciling to the claims system

B. Using one factor for every portfolio regardless of risk

C. Reconciling claims data, actuarial calculations and the general ledger

D. Suppressing adverse development from management reports

Correct Answer: C. Reconciling claims data, actuarial calculations and the general ledger