LCP publishes new research papers aimed at helping non-life insurers strengthen reserving practices and improve reserve risk modelling

LCP has authored two papers that address significant challenges facing the market: how reserving teams can identify classes of business most at risk of deterioration, and how insurers can better reflect uncertainty when modelling reserve risk for capital-setting purposes.

The first paper, Faster Close Reserving, introduces a new framework that helps actuaries identify classes most at risk of future reserve deteriorations. By converting information traditionally reviewed using multiple graphs / charts into a clear numerical indicator, the approach enables reserving teams to focus their attention on areas of greatest risk and potentially reduce the time required to reasonableness check reserving assumptions. Testing on a large market dataset showed the framework correctly identified the majority of subsequent reserve deteriorations while narrowing the number of classes requiring detailed review.

The second paper, Backtesting reserve risk: a compound lognormal framework, examines whether commonly used approaches to reserve risk modelling fully capture the uncertainty observed in real-world reserve movements. The research proposes a new framework that introduces an additional layer of uncertainty into reserve risk models, helping insurers better reflect risks not be captured by traditional methods alone.

Tom Durkin, Partner and Head of Insurance Consulting commented:

I’m delighted to see the superb research by the LCP team contributing to research in both reserving and capital modelling for general insurance. LCP as a whole has a strong ethos around research and development, and our work in these two fields is a testament to that.