Reserving and Capital Setting: Background and Challenges

emerging risks. Unforeseen inflation and anticipated legislative changes over a 10 to 30 year period present many demands. In order to prepare for emerging risk scenarios, future trends and related uncertainties need to be explicitly identified, contemplated and estimated. The concept of emerging risks is not a new one in the context of (re)insurance; the market has always faced some new challenge as the world around us has changed. Aviation, for example was once considered an emerging risk. Now, it is well understood and the market for risk transfer has been operating for decades. The same will inevitably come to pass for many of the risks discussed in this report. The question is how to try and quantify them and then manage them now while they are less understood. Reserving has always been the realm of actuaries and the strapline for the actuarial profession for a long time has been "Making Financial Sense of the Future." This ambition to make sense of the future is particularly challenging in the context of reserving and MetaRisk® Reserve^TM) can assist in detecting the emergence of new inflation trends as well as other disruptors early on. These tools allow (re)insurers to dynamically stress-test changing inflation scenarios and other emerging claims drivers. Then, capital should be set at a level to mitigate against such surprises and protect the balance sheet. For many emerging risks discussed in this report the tail will be long so the capital will likely be largely contained in the reserving risk category. Most reserving risk assessments, including those that are incorporating the relatively new GLM techniques, still rely on the use of past data with the associated issues this presents. For these reasons we need to look beyond the traditional actuarial tool kit for solutions. Click here to register to receive e-mail updates >> Note: 1. A.M. Best Special Report: 1969-2009 Impairment Review.