Under Solvency II, reserving risk takes on a different meaning, based on the change in the estimated ultimate loss over a one-year time horizon, which accounts for the payments during the one-year time horizon and the consequences for future payments (i.e., the change in reserves) after the one-year time horizon. A number of models- most notably those developed by Mack in 1993 and later refined by Merz and Wüthrich—have provided insurers well thought out and documented approaches for determining reserve variability and estimating unpaid claims on an ultimate time horizon and one-year time horizon, respectively.

This article was originally published in The European Actuary, November 2019.