This talk takes a deep dive into the results of the reserving process, ignoring discussion of methodology. Using Schedule P data, it is shown that reserves are set conservatively and are very slow to react to the emerging loss data. Basic reasons for this conservatism such as stability and risk aversion are explored but found to be lacking. Drawing from the field of behavioral economics, the corporate environment in which reserving takes place is investigated and used to help fill in the gaps and explain reserving behavior.
Learning Objectives:
Understand how the corporate environment affects the setting of reserves.
Understand the concept of narrow framing and how excessive conservatism can sometimes be applied inadvertently to reserve segmentations.
Grasp how reserves are set in practice and the factors that are incorporated into the various decisions made each quarter.
