Most self-insured reserve reviews produce both a point estimate and a reasonable range around it. The report lands on the desk of someone who has to record one number in the financials. This article is about how to make that selection responsibly.
What a reasonable range means
A reasonable range in reserving is not a statistical confidence interval, although some reports dress it up that way. It is the set of estimates a qualified actuary could defend as reasonable for the subject entity given the available data and methods. ASOP 43 talks about this directly. The range reflects method and assumption uncertainty, not the full distribution of possible outcomes.
That distinction matters. The reasonable range is usually narrower than the true distribution of what you might ultimately pay. If you treat the high end of the range as your worst case, you are understating tail risk.
What a point estimate is
The point estimate is usually a method-weighted selection the actuary considers most likely given the data. It is not the average of the range, and it is not always the midpoint. A good reserving actuary picks a point that reflects the weight of the evidence, and that point can sit anywhere in the range. If the business or data has shifted recently, it often sits above center.
How to choose what to book
Financial statements require a single number. How you select that number depends on the purpose.
Statutory reporting
For insurers, the Statement of Actuarial Opinion language creates obligations around the carried reserve relative to the actuary’s range. The short version for readers of this site: carried reserves outside the reasonable range require a qualified or adverse opinion. That is a bright line.
Self-insured and captive financial statements
Most self-insured balance sheets follow GAAP ASC 720-20 or similar guidance that asks for a best estimate of the liability. Best estimate generally means the actuary’s point estimate unless there is a specific reason to deviate. Booking above the point estimate is common and generally defensible as conservatism; booking below is rare and hard to justify.
Funding decisions
For funding a captive or setting an internal loss-cost allocation, booking the point estimate is usually the wrong answer. Funding is a decision about how much cash to set aside to keep the program solvent under adverse scenarios. Point estimates, by construction, are met less than half the time in any given program-year. Prudent funding is usually expressed as a confidence level, not as the actuary’s central estimate.
The most common mistake
The most common mistake we see is treating the reasonable range and the funding range as the same object. They are not. The reasonable range is an actuarial comfort zone around the central estimate. A funding range at, say, the seventy-fifth percentile is an economic cushion that reflects how much variability the business will tolerate before the program is underfunded. The seventy-fifth percentile is often above the top of the reasonable range, which surprises people the first time they see it laid out.
Questions to ask the actuary
If your reserve report gives you both a point estimate and a range, ask:
- Is this a reasonable range in the ASOP 43 sense, or is it labeled as a percentile of the loss distribution? These are not the same thing.
- Where in the range is the point estimate, and why?
- What is the width of the range as a percentage of the point estimate, and has that width changed since last year? A rapidly widening range often means the data is moving in a way the methods are struggling to explain.
- If we are using this for funding, what is your recommended confidence level and how does that compare to the top of the reasonable range?
A good reserve report already answers most of these in its narrative. A report that only hands you a range and a single bolded number is asking you to make a financial decision on incomplete information.
The bottom line
Point estimates are for financial reporting. Ranges are for understanding uncertainty. Confidence levels are for funding. Collapsing any two of these into one number is how reserving surprises happen.