LSTM-Based Detection of Structural Breaks in Property Insurance Loss Reserving: A Climate-Informed Approach

Abstract

Accurate loss reserving is foundational to insurer solvency, yet accelerating climate driven catastrophes systematically violate the stability assumptions on which traditional actuarial methods depend. This white paper presents a research program testing whether Long Short Term Memory (LSTM) neural networks can detect and adapt to these structural breaks faster and more accurately than Chain Ladder, Bornhuetter Ferguson, and Cape Cod methods. Using 15 plus years of regulatory development triangle data from Florida and Louisiana, enriched with NOAA hurricane intensity indices and sea surface temperatures, we hypothesize a targeted improvement of 15, 20% in reserve accuracy for catastrophe exposed years, a threshold grounded both in the prior neural network reserving literature and in the formal convergence results developed here. Beyond empirical validation, we develop a theoretical framework grounding LSTM structural break detection in probabilistic terms, providing formal performance guarantees that compensate for the limited number of catastrophe events in the test period. We document the research design, methodology, expected contributions, and a candid assessment of limitations.