Insufficient estimate of the amounts an insurer will have to pay for events already occurred, which blinds it to its own position and precedes most failures.
Under-reserving is not merely a valuation error, it is the mechanism by which an insurer blinds itself to its own position. An insufficient reserve overstates the result, so pays out profits that do not exist, overstates own funds, so inflates apparent underwriting capacity, and above all distorts the claims experience on which the following year's rates are set. Under-pricing and under-reserving then validate each other in a closed loop where each error confirms the other. The drift is gradual, each estimate staying within the defensible range, and its accumulation over a decade produces a considerable shortfall recognized only all at once, generally on a change of management or an external review.
A board does not detect the drift by examining the year's reserve, each being defensible, it detects it by asking how the estimates on earlier generations have moved since they were set.
sous-provisionnement, insuffisance de provisions, under-reserving