Expert judgement in insurance: Practices and expectations

Why expert judgement matters

Setting reserves and technical provisions (“TPs”) is one of the key responsibilities for actuaries across the insurance sector. Given the unpredictability of future experience, the reserving process inevitably involves a degree of uncertainty. As a result, expert judgement plays a central role, particularly in areas where data is limited, volatile or subject to change.

With increasing regulatory focus under Solvency II and more recently the Central Bank of Ireland’s (“CBI”) guidance, there is growing scrutiny around how these judgements are made, documented and reviewed.

Well-governed expert judgement processes support stronger decision-making, build trust in the numbers and help senior management and Boards to carry out effective oversight. In this article, we look at the evolving regulatory expectations and explore practical ways insurers can improve how expert judgement is applied, communicated and embedded in the reserving process.

Regulatory guidance on expert judgement

Both EIOPA and the Central Bank of Ireland have issued guidance on the application of expert judgement, with a strong emphasis on areas such as documentation, governance, validation and the treatment of material judgements. In the sections that follow, we consider each of these in turn. 

Regulatory focus: Documentation

Creating a dedicated expert judgement log is a practical and effective way to support compliance with both EIOPA and CBI guidance. In its September 2023 newsletter, the CBI identified the use of clearly documented expert judgement logs as a good example of emerging practice.

Similarly, EIOPA has emphasised the importance of transparency, stating:

“Insurance and reinsurance undertakings should document the assumption setting process and, in particular, the use of expert judgement, in such a manner that the process is transparent.”

In our experience, the level of detail included in expert judgement logs varies across the market. However, recent regulatory guidance points to a baseline set of content that should be considered. A well-maintained expert judgement log would typically include

• A description of each expert judgement
• The owner and approver of each judgement.
• The rationale supporting the judgement
• How the judgement has been validated
• An assessment of the materiality or sensitivity of the judgement
• Commentary on the level of subjectivity or uncertainty involved.

To support the assessment of uncertainty, one approach is to define a plausible range for each assumption and assign an uncertainty level, such as low, medium or high, to reflect the degree of expert reliance involved.

Regulatory focus: Governance process

CBI guidance recommends that material expert judgements be communicated to senior management and the Board, to ensure appropriate oversight and understanding.

EIOPA guidelines similarly require (re)insurers to establish a formal, documented feedback process between providers and users of material expert judgement, noting:

“The governance and validation process might involve internal committees, senior executive committees or the administrative management and supervisory body”. 

It is evident that both EIOPA and the CBI place a strong emphasis on transparent communication of expert judgements to the Board, with EIOPA noting:

“Insurance and reinsurance undertakings should ensure that the processes around assumptions, and in particular around the use of expert judgement in choosing those assumptions, specifically attempt to mitigate the risk of misunderstanding or miscommunication between all different roles related to such assumptions.”

Regulatory focus: Validation

The CBI’s Domestic Actuarial Regime (“DAR”) states that the Actuarial Report on Technical Provisions should include a commentary on the appropriateness of any material uses of expert judgement in the calculation of TPs. As such, documenting how these judgements are validated is essential.

One practical approach is to hold a meeting during each reserving exercise specifically focused on reviewing each expert judgement. This provides a structured forum for discussion between those responsible for setting the judgements and those tasked with challenging them. The discussion should be documented, with particular attention given to reviewing the rationale for each judgement, and assessing its sensitivity, materiality and associated uncertainty.

The DAR also notes that when conducting a peer review for a medium or high impact undertaking:

The Reviewing Actuary shall also "assess the appropriateness of the use of expert judgement in calculating TPs and address same in the Peer Review Report.”

Accordingly, the validation and challenge process is equally relevant to the peer reviewing actuary and insurers should ensure that this is encompassed within the report.

EIOPA guidelines also emphasise the importance of a validated and documented process for the use of expert judgement. The CBI has similarly indicated that the expert judgement log should include a description of the validation process applied to each judgement.

Regulatory focus: Materiality

Materiality is a key focus of regulatory guidance, yet no universal method exists to assess it. EIOPA acknowledges this challenge, noting:

“It is not possible to define specific criteria for assessing materiality of any expert judgement use case. However, this could usually be based on sensitivity tests with a percentage of variation of technical provisions or future profits. It could either be considered at portfolio level or for the whole calculation, depending on the nature of the assumption.

One criterion might also be defined based on the users (e.g. would a significant change in an assumption set by expert judgement influence decisions taken by the management body - change in the program of reinsurance, change in the activities/products sold, etc.).” 

In practice, many firms use sensitivity testing to support the assessment of materiality. This might involve evaluating the impact of alternative judgements on the TPs. If an expert judgement has the potential to influence key business or management decisions, this may also indicate materiality. What is important is that firms apply a consistent approach and clearly document the rationale behind their materiality assessments.

What good practice looks like in the industry

Beyond meeting regulatory requirements, a number of firms are adopting more structured and transparent approaches to expert judgement. The following features represent emerging best practice across the market. 

Industry practice: Documentation

A particularly effective practice observed is the use of clearly defined trigger levels that, once breached, prompt an early review of the expert judgement. The basis for setting these thresholds and the associated approval process should also be documented. Where the expert judgement is subsequently updated following a trigger event, it is important to document the revised rationale to maintain transparency and ensure senior management are kept informed of material changes. 

Another effective feature is a summary that sets out where and how each expert judgement is applied, along with the reporting metrics it affects. These can be grouped by reporting basis, such as financial statements or Solvency II TPs, with subcategories covering areas such as expenses, risk margin or discounting assumptions. This structure improves transparency and helps senior stakeholders understand the scope and impact of each expert judgement.

Best practice also points to assigning a unique reference number to each expert judgement. This can be supplemented with a column identifying any interdependencies between expert judgements by referencing the unique identifiers of related entries. This helps senior management and Boards understand linkages across assumptions, particularly where they are not closely involved in day-to-day reserving activities. 

Industry practice: Governance process

Best practice suggests keeping a clear and structured record of the governance process associated with expert judgements. This can be maintained within the expert judgement log itself or documented in an accompanying governance note. The record should include:

• a description of how each expert judgement was established and reviewed by senior management 
• the frequency at which the log and each individual expert judgement are reviewed, along with the date of the next scheduled review
• version control for the documentation with the owner and approver of the document included.

Firms that have carefully considered how to communicate expert judgements to the Board and senior leadership often show that the materiality and uncertainty associated with each judgement are well understood. This, in turn, supports meaningful challenge and enhances governance oversight. 

Industry practice: Validation

The validation approach should be tailored to the nature and materiality of each expert judgement. From our review of best practice, it is clear that the method of validation should be recorded as part of the expert judgement documentation.

For example, this may involve an Actual versus Expected analysis or benchmarking against peer and industry data. It is also good practice to include a reference or link to the documentation where the most recent validation of the expert judgement took place.

Industry practice: Materiality

In line with regulatory guidance, each expert judgement should be assessed for materiality, with the outcome clearly documented. One effective method we have observed is to include a dedicated section in the expert judgement log that classifies each judgement as low, medium or high in terms of materiality, using defined thresholds.

For example, where sensitivity testing indicates that an alternative assumption would result in a change to reserves of less than a specified amount (e.g. €100,000), the expert judgement may be considered to have low materiality.

Conclusion

Expert judgement remains a vital part of the reserving process, especially in an environment where uncertainty continues to evolve, and reliable data is not always available. As regulatory expectations grow and Boards are asked to place increasing reliance on actuarial estimates, the need for clear, well-governed, and transparent expert judgement processes has never been more important.

While Solvency II and the Central Bank of Ireland provide a solid regulatory foundation, the insurance industry is steadily evolving its own standards by embedding strong governance, validation, and documentation practices into everyday reserving activities.

Actuaries who take the time to clearly explain the reasoning behind their expert judgements and who engage proactively with senior management are doing more than just meeting compliance requirements. They are building trust, supporting better decision-making, and helping to ensure that reserves are appropriate and resilient in the face of future uncertainty.

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