1. Reserving risk is the risk that Insurance Liabilities recorded by the Insurer, net of reinsurance and other recoveries in respect of those liabilities, will be inadequate to meet the net amount payable when the Insurance Liabilities crystallise. Insurance Liabilities include the liability for claims incurred up to the reporting date, as well as the Premium Liability. In the case of General Insurance, reinsurance recoveries anticipated in respect of those liabilities are generally recognised as a separate asset. In the case of Long-Term Insurance, Insurance Liabilities include also the net value of future Policy Benefits and the effects of reinsurance arrangements are taken into account when these are estimated.
2. An Insurer's risk management system should therefore include a process for ongoing review and appraisal of the Insurance Liability valuation framework (i.e. assumptions made, reinsurance recoveries estimated etc). In conducting this review, consideration should be given to emerging pricing and claim payment trends.
3. An Insurer should maintain appropriate systems, controls and procedures to ensure that the provision for Insurance Liabilities is, at all times, sufficient to cover any liabilities that have been incurred, or are yet to be incurred on Contracts of Insurance accepted by the Insurer, as far as can be reasonably estimated.
4. Appropriate methods should be applied in estimating the provision for Insurance Liabilities, including provisions in respect of individual notified incurred claims. In determining a provision estimation method, managers may consider using alternative approaches before selecting those which may be regarded as most appropriate to the nature of the business.
5. Appropriate methods should be applied in estimating the amount of the asset in respect of reinsurance recoveries that are expected to arise on crystallisation of the gross Insurance Liabilities. The manner of estimating those assets should be consistent with the manner estimating the gross liabilities, except where there is a sound justification for doing otherwise.
6. Suitable systems and controls should be put in place to ensure that the selected approaches are applied accurately and on a consistent basis.
7. Procedures should be in place to review and monitor, on a regular basis, the out-turn of provisions made in previous years for Insurance Liabilities, both gross and net of reinsurance recoveries.
8. An Insurer is required by Chapter 7 to obtain an annual report by an Actuary on the valuation of its Insurance Liabilities and associated assets. The Rules do not require the performance of an actuarial valuation at other times, however an Insurer should consider the use of actuaries or other appropriately qualified and experienced loss reserving specialists to estimate Insurance Liabilities periodically through the year. The Insurer should in any case undertake periodic testing of its reserving processes and the level of its reserves, including continual reassessment of assumptions used, and testing the sensitivity of the valuation of Insurance Liabilities to stress arising from realistic scenarios relevant to the circumstances of the Insurer. Whether in-house or outside experts are used, appropriate procedures should be in place to ensure that the specialist selected possesses the appropriate level of skill and experience and has available the necessary information to carry out the estimation required.
9. Suitable controls should be in place to ensure that the data used in determining the Insurance Liabilities are extracted from the underlying records accurately and to the necessary level of detail. The level of detail should be sufficient to ensure that the data available to managers in their assessment of Insurance Liabilities covers the whole of its liabilities and exposures under Contracts of Insurance.
10. Scenario testing should cover a period of several years into the future, particularly in the case of an Insurer carrying on Long-Term Insurance Business.