For a given financial statement, what should represent an insurer's best estimate of the liability?

Question

Options

• Areasonable reserve
• Bcarried reserve
• Cindicated reserve
• Dformula reserve

• A
  3% (1)
• B
  82% (27)
• C
  6% (2)
• D
  9% (3)

Explanation

Carried reserve is the amount actually recorded on an insurer's financial statements, and under generally accepted accounting principles, that booked figure should represent management's best estimate of the outstanding liability - making it the direct answer to what "should" appear on a financial statement.

Why the others are wrong:

• Reasonable reserve (A) refers to a range of actuarially acceptable estimates, not a single point estimate recorded on the books.
• Indicated reserve (C) is the actuary's calculated recommendation - it informs the carried reserve but isn't itself the balance sheet figure; management may ultimately book a different amount.
• Formula reserve (D) is mechanically derived from a prescribed regulatory formula and may not reflect the insurer's true economic judgment about the liability.

Memory tip: Think "carried = on the books." Whatever the company carries on its balance sheet is, by definition, its recorded best estimate - the word "carried" is your clue that this is the financial statement figure.

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