To determine whether an insurer typically underreserves or overreserves, actuaries compare paid losses to

To determine whether an insurer typically underreserves or overreserves, actuaries compare paid losses to

• A. The insurer's case reserves.
• B. The insurer's profits.
• C. NAIC model regulations.
• D. National averages.

Answer: (A)

The key idea is assessing reserve adequacy by pairing what has actually been paid on claims with what the insurer has set aside for those known claims. Case reserves are the estimated amounts set aside to settle known, reported claims, while paid losses are the actual cash outflows. If paid losses exceed the case reserves, it signals underreserving—the reserves were too small to cover the observed payments and likely future development. If paid losses are smaller than the case reserves, it suggests overreserving—the reserves are higher than what current payments indicate. Other options don’t directly measure this balance. Profits reflect overall profitability, not the adequacy of reserves for known claims. Regulatory models and national averages provide benchmarks or requirements but do not constitute the specific comparison used to judge reserve adequacy.

The key idea is assessing reserve adequacy by pairing what has actually been paid on claims with what the insurer has set aside for those known claims. Case reserves are the estimated amounts set aside to settle known, reported claims, while paid losses are the actual cash outflows. If paid losses exceed the case reserves, it signals underreserving—the reserves were too small to cover the observed payments and likely future development. If paid losses are smaller than the case reserves, it suggests overreserving—the reserves are higher than what current payments indicate.

Other options don’t directly measure this balance. Profits reflect overall profitability, not the adequacy of reserves for known claims. Regulatory models and national averages provide benchmarks or requirements but do not constitute the specific comparison used to judge reserve adequacy.