Peaks and troughs: Reserving through the market cycle

It is well-known that the carried reserve adequacy of the property & casualty industry, as a whole, varies significantly across the market cycle. Much less understood is the extent to which this may stem, in part, from actuarial reserving methods.  If a material relation exists, any cyclicality in actuarial reserving methods could lead to over-estimated  or under-estimated reserves, thus exacerbating the market cycle.

This paper assesses the potentially cyclical behavior of various actuarial reserving methods. These include the paid and incurred (i.e., paid plus case) chain ladder, Berquist-Sherman, and Munich Chain Ladder methods.

Originally published in the Casualty Actuarial Society E-Forum, Fall 2013.