Loss Reserving Explained
Loss reserving is one of the most consequential numbers on an insurer's balance sheet. This is a practical tour of how it's done and where the judgement calls hide.
A reserve is an estimate of what an insurer will ultimately pay for claims that have already occurred — including claims that haven't been reported yet (IBNR).
Reserving methods range from the classic chain-ladder to Bornhuetter-Ferguson to fully stochastic approaches. Each has its sweet spot: chain-ladder works when development patterns are stable, Bornhuetter-Ferguson helps for immature accident years, and stochastic methods give a distribution rather than a point estimate.
The real skill isn't running the method — it's choosing it, diagnosing when it's misbehaving, and communicating uncertainty to non-actuaries.