The concept here is that any liability that is set up should be subject to a “liability adequacy test”, ., a test to see if the liability is expected to be insufficient at runoff. If the liability is expected to be insufficient, then the financial statements are generally considered to be biased in that a future earnings loss (., negative income) would be expected from the liability runoff. To prevent such a bias, a “premium deficiency reserve” is calculated. This concern about bias is somewhat one-sided in many accounting systems, in that they find almost totally unacceptable.
