Property-liability insurance loss reserve ranges based on economic value

Anumber ofmethods tomeasure thevariability of property-liability loss reserves have been developed to meet the re-quirements of regulators, rating agencies, and management. These methods focus on nominal, undiscounted reserves, in line with statutory reserve requirements. Recently, though, there has been a trend to consider the fair value, or eco-nomic value, of loss reserves. Insurance regulators world-wide are starting to consider the economic value of loss reserves, which reflects how much needs to be set aside today to settle these claims, instead of focusing on nomi-nal values. If insurers switch to economic values for loss reserves, then reserve variability would need to be calcu-lated on this basis as well. This approach will add consid-erable complexity to reserve variability calculations. This paper combines loss reserve variability and economic val-uation. Loss reserve ranges are calculated on a nominal and economic basis for a simplified insurer to illustrate the key variables that impact loss reserve variability. Nominal interest rate and inflation volatility, interest rate-inflation correlation, and the relationship between claim cost and general inflation are key factors that affect economic loss reserve variability. Actuaries will need to focus on mea-suring these values accurately if insurers adopt economic valuation of loss reserves