What Would You Do? Responses to “Are Reserves Too High?”

By John West Hadley

The Stepping Stone, September 2025

In the June 2025 issue of The Stepping Stone, I presented the situation below. Here are selected responses and excerpts, edited for space and clarity, followed by the real-life conclusion. (Please note that inclusion of responses should not be taken as an endorsement by either the Leadership & Development Section Council or the Society of Actuaries of the positions presented.) Send your own ideas for situations to pose in upcoming issues to John@JHACareers.com.

Are Reserves Too High?

Randy was promoted to chief actuary of Middling Insurance, after his former boss was let go, in large part because he was perceived as acting too slowly to adjust reserves for current circumstances.

One of Middling’s key product lines, making up a large portion of Middling’s reserve liability, is group disability, an area in which their parent company has considerable expertise. It has received a lot of attention over the past few years, with resultant reserve strengthening. In late December, the parent company’s claims experts complete a detailed review of all large outstanding disability claims at Middling, and present their final report at a meeting with Randy, Middling’s president and VP of claims, and the head of the parent’s disability operation. The report highlights substantial opportunities to close, reduce or settle a sizeable number of claims with long tails.

Randy is asked to consider the impact of the report on Middling’s disability reserves, which all but the current VP of claims feel are overly conservative. In reviewing the report, Randy feels the report is thorough and credible, and wonders how much of the VP’s attitude may be a reaction to others sticking their nose into her business. They are in the midst of the year end reporting cycle, and any adjustment would need to be made quickly.

What would you do?

There were too many responses to include more than a few selected ones here, plus excerpts that illustrate particular points. My thanks to all!

The key question posed was whether or not Randy should reduce reserves, particularly given the short time frame. Naturally, everyone saw some degree of grey, but there was substantially more sentiment against reducing than for it. I would summarize the responses on the spectrum as follows:

2 – Inclined to reduce reserves

4 – Would seriously consider, leaning towards a reduction

6 – Would seriously consider, leaning against a reduction

4 – Inclined not to reduce reserves

Here is one response from those most inclined to reduce reserves:

Randy should highlight the substantial opportunities to close, reduce or settle some sizable claims. As a next step, it's important to know whether Middling has the appetite to make this happen and the likelihood of this happening. Assuming this is in line with the company's plan and strategy, Randy should go ahead and propose reserve releases to reflect ongoing claims management actions.

Next, one of those most inclined NOT to reduce reserves:

I would need to gather more information, but likely would not adjust reserves.

• What component of the reserves is making them seem overly conservative?
• Is it the best estimate assumptions, or is conservatism being built in with large pads?
• Are the reserves being constrained by a specific regulatory regime, for example is the PBR reserve seen as being excessively redundant compared to an economic reserve?

Given the VP of claims does not think the reserves are arbitrarily high, I would defer to their judgment for this reporting cycle. Making a hasty and quick decision to get something in for this reporting cycle could lead to errors and there just wouldn’t be enough time for Randy to do his own due diligence answering these questions. If the reserve ends up being truly excessive, that isn’t great, but it is better than making a quick decision that results in a deficient reserve that needs to be corrected later.

Now let’s hear from someone leaning towards reduction, with caveats:

Setting assumptions is one of the most important, and difficult, roles an actuary has. It is often affected by sentiment, speculation, and desired outcomes. It is important for an actuary to be objective and to use judgment appropriately. Although this isn’t exactly a case of setting assumptions, it is closely related. If I were Randy, I would consider the following:

• The expertise of the parent company in the group disability product line.
• The specific, objective concerns the VP of claims has articulated.
• The perspective of the many other individuals who believe reserves are too conservative.

Ultimately, I’d:

• Consider the three factors above and draw a reasonable conclusion about the likelihood of large claims being settled in the near future.
• Speak with peers in risk management, internal audit, and perhaps even regulators for alignment and guidance.
• Likely take into account some of the expected reserve write down, with a level of conservatism, and track actual to expected activity closely. This would give me confidence I could reduce the reserves, but not by too much, and ensure the expected experience comes to pass.

Others also suggested that IF they were to reduce reserves, taking just a percentage of the reduction indicated by the report would be appropriate:

Randy needs to understand the reasons for the VP of claims’ resistance and potentially find a middle ground. A balanced approach might involve implementing reserve changes gradually rather than all at once.

Most likely, I'd consider adjusting reserves by a percentage of the report's proposal rather than going all in. This takes into account that companies tend to get aggressive with claims numbers at the end of the year because of the pressure to make the numbers look good before the year ends.

Randy may be able to recognize a certain percentage of the "savings" in the current reporting period and then adjust over time, as said savings either do or do not develop.

Several mentioned professional ethics and judgment:

No one wants to be unpopular, but professional ethics require that we use professional judgment—actuarial professional judgment.

At the end of the day, it would be great if all of the claims experts and Randy can get on the same page. Randy has to then decide and be able to support his position. As far as the timing, he will be under tremendous pressure to lower reserves. If he cannot get to that point "in time" or comes to a different conclusion, and management chooses to lower reserves, he has to issue a qualified opinion.

This respondent saw the decision as squarely (and appropriately) on Randy’s shoulders:

Randy has the role of chief actuary, and should embrace it. He has the right, the ability, and the responsibility to make the final determination of the appropriate reserve level, and will certify that in the actuarial opinion. In the course of making that certification, he should consider at least his own work, that of the parent company, and should sit down and listen to the VP of claims and what their reason is for the feeling that the reserves are not overly conservative. He should listen and consider, then make an expert opinion that is backed up by facts and analysis, and move forward.

This actuary pointed out how contentious such situations can be:

I have been in the middle of disputes over setting GAAP reserves in general—and those can be extremely contentious. I know of multiple instances where the appointed actuary quit due to a disagreement with the CFO over what the reserves should be.

Given how fraught this sort of situation can be, and that one person may not agree, the best way to handle it may be to have a private meeting and conversation one-on-one with the VP of claims. Doing it in the larger group, after an analysis has been presented, would only make her more defensive.

While there may be resentment of an outside party analyzing claims on the VP’s part, it may also be the case that she knows of other issues for some of the claims that may not be so easily resolved. One can look like the hero as chief actuary in releasing the reserves, but nobody likes the see-sawing of reserve releases only to have to reverse it because of foreseeable claims development issues the next quarter.

Several pointed out how important the relationships involved could be, not just for this specific situation, but for Randy’s long-term future:

This is setting reserves for one reporting period, but if you're going to be there for the long haul, you're going to want to build up relationships with key people. Being on a good working relationship with the VP of claims is important as chief actuary, especially for a LOB like disability.

A one-on-one conversation with the VP of claims ASAP might change my mind. More realistically, it might make me a friend.  

I love the setup which isn’t about reserving but in fact about your approach to making friends and enemies. Randy has two choices—he can use his professional judgment to reflect lower claims reserves or he can go sit with the VP of claims to understand their concerns with the report. I can’t tell you exactly what comes next because I can’t predict if the concerns of the VP of claims have merit. The key here is to build relationships with others in the organization.

Randy has one significant ally in the situation, namely the VP of claims. They could get together to discuss joint talking points to help the others understand more clearly their opinion regarding the recommended reserve. They could clearly delineate the pros and cons of their recommendation as well as the possible fallout which could result by not using their recommended reserve. It would also be helpful in the ongoing relationship of these senior leaders if Randy kept a close eye on the situation by suggesting a monthly reserving meeting which includes these senior leaders, so that the insurer can get ahead of the situation.

This actuary pointed out a number of questions that might affect the case, and then presented his observations:

1. How long has Randy been working for Middling? How long did he work together with the last chief actuary, and how closely did they work together? Is this Randy’s first year end as chief actuary?

The answers speak to Randy's situational experience and knowledge—in other words, his competence as a chief actuary in his current role.

2. Do the parent’s disability experts manage or otherwise oversee other group DI blocks elsewhere in the conglomerate—how have they come by their expertise, and what has been their track record? Has it been their past practice to take a continuing interest in Middling’s group DI block, or is this something new?
3. Did Randy know that this report was in the works? Did he receive a copy of the final report prior to the presentation meeting with Middling’s president? Did he receive a preliminary copy of the report's findings? Did he have a chance to ask questions about the report before the presentation meeting: its data, methodologies, comparability with prior DI claim analysis? Have the PC experts written other similar DI claims analysis reports, and if so did Randy have access to them?
4. Who exactly has "asked Randy to consider the impact of the report on Middling’s DI reserves"? The president, the expert authors of the report, or someone else in the parent? Was this just a reminder during the hurley-burley of year end? Or was there more to this request than the basic expectation that Randy would review all relevant information before arriving at his actuarial opinion? Is there pressure, articulated or otherwise, to reduce reported DI reserves now?

It's fair to say that one may come to radically different conclusions about what Randy should do depending on information that's not stated in the case. For that reason alone, Randy should "stop living under a rock" and start paying more attention to his workplace context and its dynamics. He can do this by substituting facts for appearances and demonstrations for impressions (as well as feelings). Chief actuary firings ought to be rare occurrences, yet they are invariably noteworthy, particularly when they happen close to home. In short, Randy has to get going now unless he's willing to be the next chief actuary to get fired from Middling.

Finally, this actuary emphasized trust and integrity:

More than any other business, insurance is predicated on trust. Customers are asked to pay premiums in the expectation that the funds will be there later, when and if they submit a claim. Without integrity and trust, insurance is meaningless, verging on fraud.

Actuaries have been the guardians of the trust commitments made by insurers. Others may take a short-term view, reasoning that all that matters is today’s profit, leaving the fulfillment of contractual obligations to later management generations. Actuaries are professionals who stand in the doorway and say, “so far and no farther.” In this case, the organizational politics are aligned against Randy, and it will take great courage for him to stand firm. He may even be ousted from his position and have to find new employment.

It's significant that the VP of claims supports continuing a policy of prudent reserving based on conservative projections. After all, it is the claims department that will have to face the policyholders if management starts urging questionable claims denials as a means toward greater profitability.

Of course, if the pursuit of profit over integrity drives the enterprise to insolvency, everyone will suffer. It appears, though, that all Middling management may be pressing for is a lack of good faith as a means toward greater profits and, perhaps, bigger management bonuses.

Randy now stands at a crossroads. The easy course is to weaken reserves and accept the rewards that may come his way. The harder course is to stand firm and to risk that he may be viewed as excessively moralistic and ousted for corporate disloyalty.

The wisest course would be to gather everyone in a conference room and insist that they stay there, discussing the issue until a unanimous consensus emerges. The wise reserve provision may lie between that of the corporate “experts” and the qualms of the VP of claims. That shouldn’t take so much time that the year-end reporting deadlines can’t be met.

If such a quest for mutual understanding is impossible, then Middling Insurance is not a corporation with which a person of integrity would want to be associated.

What Actually Happened?

Randy thoroughly reviewed the report, and consulted with senior actuaries at the parent company. The claims operation of the parent had deep expertise in disability, and he felt the report had a great deal of credibility. In the end, the chief actuary of the parent told Randy that although he wouldn’t have reduced reserves if it were his call, he could support Randy’s position to immediately take a percentage of the potential reduction into account. The company’s outside auditor reviewed Randy’s work and also accepted his approach without any qualifications to his opinion.

Randy segregated the claims that were the subject of the report, and applied a weighted average of the report’s potential reserves vs. the actual remaining reserves, with the weighting factor on the actual remaining reserves increasing each month. In this way, by the subsequent year-end the claim reserves would fully reflect the actual claims still inforce. As it turned out, the savings that materialized were substantially less than what the report had suggested, but the blended approach kept the reserves pretty much in line with actual results.

This article is provided for informational and educational purposes only. Neither the Society of Actuaries nor the respective authors’ employers make any endorsement, representation or guarantee with regard to any content, and disclaim any liability in connection with the use or misuse of any information provided herein. This article should not be construed as professional or financial advice. Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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John Hadley was an FSA for many years, and now works with job seekers frustrated with their search. He can be reached at John@JHACareers.com or 908.725.2437. Find his free Career Tips newsletter and other resources at www.JHACareers.com. LinkedIn: https://www.linkedin.com/in/johnwesthadley/