Swiss Re calls for better reserving practices based on market cycles

Improvements in reserving would be beneficial for the insurance industry, according to Swiss Re’s sigma study, “Non-life claims reserving: improving on a strategic challenge.”
Claims reserves (or provisions) are funds set aside for claims that have not yet been paid. Since claims reserves are often bigger than an insurer’s equity, changes in reserves can heavily impact an insurer’s profits, Swiss Re notes in a release.
Under- and over-reserving is tied to the insurance price cycle, the study notes, and some evidence suggests low pricing and under-reserving are interrelated.
“Initial claims estimates will never be perfect forecasts of final claims paid because it is virtually impossible to predict with certainty the factors that could adversely impact long-tail insurance business,” Rudolf Enz, the author of the study, said in a release. “Nevertheless, insurers might substantially improve their reserving practices by factoring in the effects of the insurance cycle and by better reflecting trends such as increasing wages, health costs and life expectancy.”
Adequate reserves help insurers avoid the risk of insolvency, which benefits policyholders, Enz noted.
The reinsurer notes the case for better reserving is supported by the trend towards more transparency. In turn, transparency is a central feature of new accounting standards and regulatory initiatives.