Despite headline results remaining strong, the underlying environment for many insurance entities in the UK, including Lloyd’s, is becoming more challenging. As the market softens, sustained performance will depend on pricing discipline and underwriting clarity, informed by a realistic assessment of reserve strength and uncertainty.

Reserving teams have an opportunity to demonstrate their value in supporting business decisions, based on the conclusions and messages from the year-end analysis. Competitive advantage comes not from predicting the future perfectly, but from understanding uncertainty better than your competitors. Those that challenge assumptions and respond early to change are likely to be best positioned for long-term success.

As reserving teams prepare for the year-end reporting season, there are several drivers of reserve uncertainty which deserve attention. With acknowledgement that there are other important drivers (many of which are technology-driven), we discuss four reserving risk drivers, why they matter for reserving and what entities can do to stay ahead.

Market cycle

We observe evidence of increasing pressure on rate and technical adequacy. For example, directional assessments across most classes of business at Lloyd’s for risk-adjusted rate changes and technical adequacy are trending unfavourably. While there is always class of business variation, rate momentum is easing, and profitability is becoming harder won.

As the market softens and competition intensifies, technical excellence becomes increasingly important. As business plans feed reserving assumptions for the least mature years, planned performance needs to account for both rate adequacy and emerging risk. Due to these pressures, reserving initiatives are becoming less about extrapolating the past and more about understanding what could happen next. Continuation of reserve releases at Lloyd’s and elsewhere is encouraging, but it should not be confused with a reduced level of reserve risk. Likewise, recent casualty reserve strengthening provides a reminder that uncertainty can reappear even after periods of favourable development.

As profitability margins tighten, to stay ahead, reserving teams should be placing greater emphasis on scenario testing, downside analysis and emerging risk assessment. A broader range of possible future outcomes needs to be considered. The conversation should extend beyond whether reserves are adequate today. Boards increasingly need to understand the uncertainty around reserves and how that uncertainty could evolve and, in turn, place greater scrutiny on rate adequacy assessments.

Claims inflation

The consideration of claims inflation has always been important in the context of reserving, especially with respect to its impact on an entity’s historical data. Actuarial reserving is heavily reliant on historical data, and most actuarial reserving methodologies assume that the level of claims inflation has been stable and that past experience is a reliable predictor of future performance.

But for a modest spike post-COVID-19 and recent rumblings regarding the impact of rising geopolitical tensions, because of which pressure has not subsided, Consumer Price Index (CPI) and wage inflation have been relatively well behaved. More recently, claims arising from liability and financial lines products, especially in US markets, have been impacted by social inflation, which reflects rising litigation costs and changes in public sentiment towards accident victims. The challenge is that the claim cost increases driven by social inflation elements are difficult to separate from (1) increases driven by CPI and wage inflation and (2) increases driven by the evolving factual and strategic case-mix, hindering the ability to accurately calibrate expectations. Downstream, decisions regarding the precise calibration of the different inflationary forces can have a disproportionate influence on both existing case reserves and future pricing decisions. As market conditions transition from hard to soft, small inconsistencies in the alignment of inflation assumptions can lead to large differences in profitability expectations.

To stay ahead, reserving teams should ensure inflation assumptions (of various types) are aligned with the viewpoints of other departments, grounded in claims drivers. Reserve exercises must apply additional scrutiny to unexpected movements in open claims to ensure that decreases are not driven by weakening case reserves (a recurrent feature of soft markets) and, on the other hand, that changes in facts and circumstances are not mistaken for inflation.

Major loss events

Traditionally, catastrophe losses have been associated with major events like hurricanes and earthquakes. More recently, other secondary perils have driven losses from major events, while losses from natural catastrophes have waned. According to Swiss Re, in 2025 insured losses from catastrophe and severe weather events were around $107 billion, and a record 92% of those losses came from secondary perils. Secondary perils are events like wildfire, severe convective storm, flood, freeze and winter storm. On their own, they may be smaller than a major hurricane or earthquake, but they happen more frequently and can add up to a very significant amount over the course of a year. Climate change is part of the conversation because it affects the conditions underlying some major events, but it is not the whole story. Exposure growth, higher insured values, inflation and claim complexity are all driving loss size and reserve uncertainty.

A main challenge is that the uncertainty inherent in major losses goes well beyond an initial loss estimate because secondary perils are often not modelled as effectively. Further, the drivers of the timing and amounts of claim development for secondary perils are less familiar, as segregation and measurement have been historically uncommon. The modelling challenges which amplify uncertainty include subrogation uncertainty, questions around liability, recovery potential, legal process and timing. Such amplification can have a real impact on estimates of the ultimate net loss and the stability of estimates over time.

Secondary perils are placing traditional reserving approaches under pressure, making it harder to rely on historical patterns alone. A much broader and more active set of loss drivers is in play, including inflation, exposure growth, changing weather patterns and less familiar and more complex claims development. To stay ahead, insurers need a more integrated approach that overcomes the limitations of traditional reserving approaches, bringing together actuarial judgement, claims insight, catastrophe analytics and stronger event-level monitoring and modelling.

Geopolitical environment

Geopolitical events in recent years have changed the risk landscape and, in the eyes of the western world, altered our perception of risk. This was most evident in Russia’s invasion of Ukraine in 2022, while the initiation and playing out of subsequent conflicts, particularly in the Middle East, have cast doubt over the global balance of power and the strength of diplomatic norms that had otherwise prevailed since the end of the Cold War.

It is important to remember that geopolitics is broader than just international conflict. It is linked with things such as technology and climate change. Firstly, social media is shifting power away from government institutions and towards individual citizens, enabling rapid and wide sharing of information, whether for good or bad. In some cases, this leads to social unrest and even influences the outcomes of political processes. Secondly, artificial intelligence is changing the way war is waged and has placed power in the hands of private corporations on a level that may rival major governments. Climate change, in its own right, is a topic of political debate and creates a source of urgent political pressures as populations are adversely impacted.

Insurance markets have felt the direct impact of these events, through losses on marine, aviation, war and political violence classes. Event-specific estimates which account for company exposures need to be both robust, accounting for the latest facts and circumstances, and flexible, anticipating ramifications of the current high-entropy world. For reserve estimates to adequately account for the wider indirect impacts, more frequent risk mapping enables the management of connections and interdependencies.

To stay ahead, insurers require cross-function collaboration to map and manage risks and identify opportunities. Leadership must ensure that relevant experts across its business are working together to understand and monitor exposures, identify interdependencies and points of potential escalation, and explore the scenarios and impacts that affect reserves.

How UK reserving teams should assess key 2026 risk drivers

Reserving should move beyond a year-end control exercise and operate as a continuous management tool, supporting decision making and navigating uncertainty. To prepare for the year-end reporting season in the context of the four reserving risk drivers discussed, reserving teams should ensure the following elements of the reserving framework are in a good position:

1. Regarding the market cycle, reserving teams should be summarising the impact of internal and benchmark assessments of rate adequacy (e.g., scenario tests, downside analysis and assessment of emerging risks), looking for areas of expert judgement that would benefit from additional scrutiny or where a broader range of possible future outcomes needs to be considered. The output from the reserving team extends beyond whether reserves are adequate today to include how existing uncertainty could evolve.
2. Regarding claims inflation, reserving teams should ensure that the viewpoints of other departments have been solicited and that the final selected inflation assumptions are grounded in claims drivers. Although likely a quarterly exercise, with several quarters already completed, a framework for identifying and evaluating unexpected movements in case reserves, executable within the tight timelines at year-end, should be ready to go.
3. Regarding major events, leveraging structured historical data to enhance the knowledge and benchmarks available for secondary perils, including development patterns specific for past events and ratios of event to non-event frequency, severity and ultimate loss.
4. Regarding the geopolitical environment, a mapping of risks and interdependencies should be updated, and relevant experts across the business should be identified and ready to engage. Summarising the aggregate view, including points of potential escalation, before the year-end provides a basis from which pre-defined scenarios can be contrasted with actual manifestation.

Competitive advantage comes not from predicting the future perfectly, but from understanding uncertainty better than your competitors. Those that challenge assumptions and respond early to change are likely to be best positioned for long-term success.