B.5. Development

Question 1

Four steps in estimating ultimates

Answer 1

1. Exploratory analysis of data
2. Apply appropriate techniques to estimate ultimates
3. Evaluate conflicting results of different techniques
4. Monitor projections of actual vs. expected development

Question 2

Reason to develop losses in ratemaking

Answer 2

So rates in future policy period will be adequate to cover ultimate costs coming from policies using those rates

Question 3

Areas in estimating ultimates for which actuarial judgment is needed

Answer 3

Determining optimal combinations of claims to use (granularity)
Assessing effect of insurer’s operational changes on data
Adjusting data for known and quantifiable events
Evaluating strengths and weaknesses of methods
Making final selection of estimated ultimate

Question 4

What changes a closed claim count as a % of reported claim counts triangle can show

Answer 4

Speedup or slowdown in closing claims over time

Question 5

What changes in average paid on closed claims triangle can show

Answer 5

Severity trends and speedups or slowdowns in the closing of small claims relative to large claims

Question 6

What changes an average case reserve triangle can show

Answer 6

Severity trends, speedups or slowdowns in closing of small claims relative to large claims, and changes in case reserve adequacy

Question 7

What changes a paid to reported loss triangle can show

Answer 7

Speedups or slowdowns in closing of claims and changes in case reserve adequacy

Question 8

Key characteristics to use in deciding triangle granularity

Answer 8

Similarity in coverage
Volume of claim counts (credibility)
Reliability of case reserves
Report lag
Settlement lag
Likelihood of claims reopening
Claim severity

Question 9

Downward development reasons

Answer 9

Case reserve decreases
Deductible recoveries
Salsub

Question 10

Selections for age-to-age

Answer 10

Straight average
Weighted average
Geometric average
Medial average (ex. hi-lo)
Judgment
Latest year
Industry benchmarks

Question 11

Characteristics to look at when selecting LDFs

Answer 11

Smooth progression of LDFs across columns
Stability of LDFs for same column
Credibility of experience
Changes in patterns
Applicability of historical experience

Question 12

Impact on future estimates based on reported chain ladder with a recent decrease in case adequacy

Answer 12

Historical LDFs would be based on higher case adequacy. Using those LDFs to project recent data would cause you to underproject ultimate losses

Question 13

Impact on future estimates based on paid chain ladder with a recent increase in claim settlement rates

Answer 13

Historical LDFs would be based on slower settlement rates. Using those LDFs to project recent data would overproject ultimate losses

Question 14

Common methods for selecting a tail factor

Answer 14

Special study that contains more years of data
Using industry benchmark tail factor
Fitting a curve to the LDFs and extrapolating
Use reported-to-paid ratios at latest paid development period
Judgment (arbitrary selection)

Question 15

Formulas for ultimate, IBNR, and unpaid claims estimates

Answer 15

Ultimate = latest value x CDF
IBNR = Ultimate - latest reported
Unpaid = Ultimate - latest paid

Question 16

Impact of large loss in cumulative triangle on LDFs

Answer 16

Spike when loss appears, then drop

Question 17

Do triangles need to be adjusted for one-time changes?

Answer 17

Usually not, as changes can be isolated to appear on separate rows.
Triangles do need to be adjusted for law changes that impact open claims or in-force policies.