Prior year development is a critical but nuanced concept in P&C insurance. Terminology related to prior year development, like “reserve strengthening” and “reserve release”, can be confusing at best or misleading at worst.
The purpose of the attached 2-page PDF is to help demystify the topic of prior year development. Below are the key takeaways:
- Prior year development is the change in estimates of ultimate loss between two evaluation dates for identical prior accident periods.
- The accident periods between respective evaluations must be identical, otherwise the comparison is not on an apples-to-apples basis.
- Positive prior year development is called adverse prior year development, or “reserve strengthening”.
- Negative prior year development is called favorable prior year development, or a “reserve release”.
- No prior year development (no change in ultimate loss between successive evaluations) is a common for mature accident periods.
- A change in ultimate loss (i.e., prior year develoment) does not necessarily correspond to a change in loss reserves.
Do you have questions about this topic? Let me know in the comments!