A reduction in reserves is referred to as__________________, while an increase in reserves is referred to as________________.

Question

Options

• Afavorable development, adverse development
• Bunfavorable development, profitable development
• Crisky development, beneficiary development
• Dloss development, advance development

• A
  72% (21)
• B
  17% (5)
• C
  3% (1)
• D
  7% (2)

Explanation

Option A is correct because in insurance/actuarial practice, favorable development means reserves turned out to be higher than needed, so they are reduced - a positive outcome for the insurer. Conversely, adverse development means actual losses exceeded expectations, requiring reserves to be increased - a negative outcome.

Why the distractors fail:

• B is partially plausible ("unfavorable development" is a real synonym for adverse development), but it's placed in the wrong slot, and "profitable development" is not a standard insurance term.
• C uses invented terms ("risky development," "beneficiary development") that have no meaning in reserving terminology.
• D confuses terminology: "loss development" describes the process of how losses evolve over time (not specifically a decrease), and "advance development" is not a recognized term.

Memory tip: Think of it from the insurer's perspective - if reserves go down, that's favorable (you over-reserved, which is good news). If reserves go up, that's adverse (claims cost more than expected, which is bad news). The direction of the reserve change mirrors the financial sentiment.

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