Ch 30, page 25 Please validate the thought process This line in the core reading which says "if we calculate supervisor reserve on a prudent basis then we should always expect to see a surplus in an analysis of surplus on the supervisory basis so alarm Bell should start to ring if any item is negative" My understanding for the same is "that when we use the supervisory reserve on prudent basis then we tend to increase our liabilities which means that reserves increases so which leads to less or negative surplus" .. so please confirm what does it mean with any item being negative. Is it talking about surplus being negative due to increase in reserve by using prudent basis"
Hi Mahima I think you are thinking about setting up a prudent reserve now. Then yes setting up a prudent reserve leads to a loss now. However, the statement you quote is looking at the future surpluses that we would expect to emerge from this reserve. When reserving we have assumed that future claims experience will be worse than our best estimate, so the actual experience should be better than the reserving assumptions leading to surpluses in the future. Best wishes Mark
