Reporting Reserve Uncertainty to a Board: Making the Range Useful
By Jonas Mohamed Osman Abdelghafour
How to present reserve ranges, judgement and actual-versus-expected movements so that non-specialist directors can challenge them effectively.
Executive answer
A reserve range is only useful to a board if it is accompanied by what would have to be true for each end to occur. Percentiles without drivers invite either false comfort or unfocused anxiety. The reporting goal is to make the two or three assumptions that dominate the range visible and debatable.
The reporting package that works
A best estimate with its movement since last review, the range with named drivers, the actual-versus-expected track record over recent periods, the classes where judgement exceeds data, and a short list of the specific things that would change the answer. Everything else is appendix material.
Language discipline
Terms such as best estimate, prudent, one-year, ultimate, gross and net should be defined once and used consistently. Much of the confusion in board discussions of reserves comes from unlabelled shifts between these, not from the underlying statistics.
Governance considerations
Directors should be able to see how previous ranges performed. A track record of actual outcomes against previously reported ranges is the strongest available evidence of whether the firm's uncertainty estimates are calibrated, and it is rarely presented.
Conclusion
Uncertainty communicated well produces better decisions than precision communicated badly. Building that reporting discipline is part of how Jonas Mohamed Osman Abdelghafour supports reserving and capital committees.
Primary sources
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