Reserving Bases

An insurer calculates reserves for many different reasons, including:• Determining liabilities for published accounts and for solvency supervision (e.g., under Solvency II).• Informing internal management accounts, business plans, and budgets.• Estimating claims costs as part of the premium rating process.• Valuing the insurer for a sale or purchase.• Ascertaining tax liabilities.The assumptions used will likely differ depending on the purpose. For example, Solvency II requires a best estimate for solvency supervision, while published accounts may use a more prudent basis to ensure stability. For a company sale, a buyer would prefer a prudent estimate, whereas a seller might prefer a more optimistic one.While changing the reserving basis does not affect the company's true financial position, it does alter the disclosed result, which can have indirect consequences. For instance, an overly cautious basis could lead an insurer to change its investment policy if it incorrectly suggests solvency is in doubt#anactuary #actuarialscienceonlinecoaching