You finish a reserve review and land on an ultimate claim estimate. Before you sign it, ask a harder question: does the number tell a believable story? Translate it into the loss ratios, severities, frequencies, and pure premiums it implies, then check whether that pattern makes sense.
An unpaid claim estimate is only a residual: ultimate claims minus paid claims. You cannot judge it directly. But every ultimate estimate implies a set of ratios you already have expectations about. If those implied ratios are wildly off trend, the estimate is suspect.
KEY: You do not test the reserve dollar in isolation. You test the ultimate it produces by asking whether the implied loss ratio, frequency, severity, and pure premium are consistent with each other and with prior years.
Reasonableness testing assumes you have several candidate estimates to compare. Berquist and Sherman recommend that a complete unpaid claim analysis draw on methods spanning five categories:
- Reported claim projections
- Paid claim projections
Common mistakes
- Comparing raw loss ratios across years. Without on-leveling premium and trending losses, a 2022 ratio of 75.0% and a 2024 ratio of 88.4% are not comparable; part of the gap is rate and cost level.
- Dividing ultimate by exposures and calling it severity. That is pure premium. Severity divides ultimate by claim counts.
- Treating any severity rise as an error. A 5% increase that matches claim inflation is expected. Only movements beyond the drivers are red flags.
Bottom line
- Reasonableness testing means converting your unpaid estimate into implied ultimate metrics, then checking they form an explainable pattern across accident years.
- Five diagnostics: implied loss ratio, implied pure premium, implied frequency, implied severity, and average unpaid per open-plus-IBNR claim.
- Pure premium equals frequency times severity; loss ratio equals pure premium divided by average premium.
- Compare years only after bringing them on-level: adjust premium to current rate level and trend losses to a common cost level.
Exam shortcut
When handed ultimates by accident year, immediately build four columns: loss ratio, pure premium, frequency, and severity. The outlier year is the answer to almost any reasonableness prompt. Before comparing loss ratios, silently on-level the premium and trend the losses. Two years that look different raw often match once adjusted, and the true outlier only then appears. Split every pure premium into frequency times severity.
The full lesson (about 2,444 words, 16 min read) adds 3 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B16
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