6. Reserving Methods

Question 1

Reported Claims

Answer 1

Reported Claims = Paid Claims + Case Outstanding

Question 2

Unpaid Claims (2 formulas)

Answer 2

Unpaid Claims = Case Outstanding + IBNR (Broad Def.)

= Ultimate Claims - Paid Claims

Question 3

IBNR (Broad Definition) (sum of 4 elements)

Answer 3

1. Pure IBNR
2. Provision for claims reported but not recorded
3. IBNER (Adj to Case Reserve)
4. Estimate for reported claims

Question 4

Ultimate Claims

Answer 4

= Paid Claims + Case Outstanding + IBNR
= Reported Claims + IBNR

Question 5

3 Approaches to Select Tail Factors

Answer 5

1. Industry benchmark development factors
2. Curve fitting to extrapolate the tail factors (Exponential decay)
3. Utilizing reported-to-paid ratios at the latest observed paid development period

Question 6

Assumptions of development method (3)

Answer 6

1. Claims recorded to date will continue to develop in a similar fashion in the future
2. For AY not fully developed, claims observed thus far give us relevant information on claims that give us relevant information on claims that have yet to be observed
3. Throughout policy period :
   3.1. Consistent claims processing (Settlement rate & case reserve adequacy)
   3.2. The mix of claims is stable
   3.3 Policy limits and deductibles are stable (if any)
   3.4 Reinsurance retention limits are stable (if any)

Question 7

Situations in which the development method works well (3)

Answer 7

1. Large amount of credible historical claims data available
2. High-frequency, low severity lines with stable and timely reporting of claims
3. When the presence or absence of large claims does not greatly distort the data

Question 8

For development method : Impact of speedup in settlement rate

Answer 8

Paid Claims : Overestimates development factors dans ultimate claims

Reported Claims : No effect

Question 9

For development method : Impact of Increase in case reserve adequacy

Answer 9

Paid Claims : No effect

Reported Claims : Overestimates development factors and ultimate claims

Question 10

For development method : Impact of increase in freq and/or sev

Answer 10

Claims increase, but development factors are unaffected

Question 11

For development method : Impact of increase in exposures

Answer 11

Claims increase, but development factors are unaffected if the average accident date is held constant

Question 12

For development method : Impact of

Answer 12

Underestimates development factors and ultimate claims

Question 13

For development method : Impact of change in product mix

Answer 13

Development factors change to reflect the new mix

Question 14

Expected Claims Method : Key Assumptions (2)

Answer 14

1. Claims paid to date for a given AY provide no useful information on future claims for that AY
2. The actuary can determine a reasonable expected claims ratio

Question 15

Uses of expected claims method

Answer 15

1. New line of business or territory
2. Operational or environmental changes makes historical data unreliable
3. Development factors for early maturities are highly leveraged
4. Data is limited or unavailable

Question 16

Advantage (1) and disadvantage (1) of expected claims method

Answer 16

Advantage : Not subject to data uncertainties, gives very stable ultimate claims estimate

Disadvantage : Not responsive to recent claims experience

Question 17

For expected claims method : Impact of speedup in settlement rate

Answer 17

Paid : Overestimates ultimate claims, but not as much as the development method would

Reported : No impact

Question 18

For expected claims method : Impact of increase in case reserve adequacy

Answer 18

Paid : No impact

Reported : Overestimates ultimate claims, but not as much as the development method would

Question 19

For expected claims method : Impact of increase in freq/sev

Answer 19

The EC method accounts for changes unless they occurred within the most recent year
In that case, ultimate claims would be underestimated

Question 20

For expected claims method : Impact of increase in exposures

Answer 20

No effect, as long as average accident date is held constant

Question 21

For expected claims method : Impact of average accident date shifts forward

Answer 21

Underestimates ultimate claims, but not as much as development method

Question 22

For expected claims method : Impact of change in product mix

Answer 22

Impacted if segments changing have different development patterns or different ECR

Question 23

Main assumption of B-F method

Answer 23

Unreported/Unpaid Claims will develop based on expected claims

Question 24

Situations in which B-F works well (3)

Answer 24

1. When there are random fluctuations or large claims at early maturities
2. When entering a new line of business
3. When estimating ultimates at early maturities for long-tailed lines of business

Question 25

Advantage of B-F (1)

Answer 25

Provides more stable estimates than the development technique and more responsive estimates than the expected claims technique

Question 26

Advantage of Barktander (1)

Answer 26

More responsive than B-F, more stable stable than development

Question 27

Challenges of B-F (2)

Answer 27

1. Estimating the expected Claims
2. Estimating the expected % unreported