For more than thirty years, reserve adequacy for the property and casualty (P/C) insurance industry has been highly cyclical, alternating between periods of adverse and favorable reserve development. No one knows for certain what factor or factors cause these swings. It's commonly thought that internal industry influences—such as claims department practices, changes in pricing, or management decisions—are potential sources. Although we expect these elements do play a role, there's no evidence to suggest they are the primary reason for the reserving cycle.
What few have considered, on the other hand, is the possibility that common methods used by actuaries to determine appropriate reserves may themselves be an important contributing factor to movements in the reserving cycle.
This article originally appeared in the March/April 2014 issue of Contingencies.