A leading actuary has warned that many insurers could be failing to hold enough reserves to pay claims by not taking into account the "volatility" of future losses.
Joe Monk, a partner at actuary Lane Clark & Peacock, said: "If companies don't understand the range of uncertainty in their reserves, they can't understand the range of uncertainty in pricing."
He added that insurance companies did not fully take into account the spread of predicted future claims when calculating claims reserves.
For example, in one book of "volatile" business, the predicted claims values may be spread across a wide range - for example, some claims may be quite small whereas others very large.
In another book, the predicted claims may be grouped closer together. But in both cases the average claim size, often used to determine reserve levels, may be similar.
Monk said: "The range can be very large and the boards of insurance companies need to understand that. In these cases [where there is volatility] it may be appropriate to hold more reserves.
Monk added that it was not currently an FSA requirement to declare the reserve ranges, But forthcoming changes in accounting rules will change this, he said
