Q&A Bank 6 Question 2

[ActEdStudent]

This question is about the distinction in the technical reserves required between accident-year and three-year accounting. The answer says that IBNR should be less of an issue for three-year accounts and the reserves do not need to be determined until the end of third year. This is not how it works in practice though is it? You would estimate IBNR reserves more regularly than waiting for the three years to pass and the year of account to close?

 

[Ian Senator]

IBNR is "less of an issue" because after 3 years more claims would have been reported (unless it's longer tailed than that!).

If you go strictly by the Core Reading, then you only calculate profit (or loss) at the end of the 3 years - officially. But you're right, in practice, of course you'd be calculating reserves at each year-end (if not more often than that), so that you can get an idea of the ultimate outcome. Indeed, if you're 1 year in to a 3-year account, and you think you're ultimately going to make a loss, it would be nice to have a capital injection at that point (this may even be obligatory) - and so of course you'd need to calculate reserves at that point too.