SOFA-CFE · Question #334
The change in reserves equals the gross losses unpaid (liability) at the end of the period less net unpaid losses at the beginning of the period.
The correct answer is B. false. Option B is correct because the statement incorrectly mixes gross and net figures. The change in reserves must use consistent basis: it equals the net unpaid losses at the end of the period less the net unpaid losses at the beginning - or gross-to-gross, not gross-to-net…
Question
The change in reserves equals the gross losses unpaid (liability) at the end of the period less net unpaid losses at the beginning of the period.
Options
- ATrue
- Bfalse
How the community answered
(38 responses)- A16% (6)
- B84% (32)
Explanation
Option B is correct because the statement incorrectly mixes gross and net figures. The change in reserves must use consistent basis: it equals the net unpaid losses at the end of the period less the net unpaid losses at the beginning - or gross-to-gross, not gross-to-net.
"Gross" refers to amounts before reinsurance recoverables, while "net" reflects amounts after deducting reinsurance. Subtracting a net beginning balance from a gross ending balance conflates these two distinct measures, producing a meaningless and inaccurate result.
Option A (True) is wrong because it accepts the flawed formula without catching the gross/net inconsistency, which would overstate the change in reserves by failing to back out reinsurance on a consistent basis.
Memory tip: Think "apples to apples" - gross minus gross, or net minus net. Any formula that crosses gross and net is automatically suspect on an exam.
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