Chapter 15 - Quantifying Uncertainty in Reserves

Question 1

Process uncertainty

Answer 1

Randomness of the underlying process resulting in uncertainty in what the future outcome will be.

Question 2

Parameter uncertainty

Answer 2

Uncertainty arising from the selection of parameters which results in uncertainty in the modelling results

Question 3

Model error

Answer 3

Error or uncertainty arising from the fact that the model selected may be inappropriate

Question 4

Systemic error

Answer 4

Uncertainty arising from unforseen trends or shifts away from the current claims environment

Question 5

Components of Model Error

Answer 5

1) Specification error: Error in the specification of the model
2) Systemic error: Systematic changes making the data used irrelevant
3) Estimation of parameter error: Estimated parameters are random variables. Hence their estimation may not be perfectly accurate
4) Process error: Errors arising from the inherent noise in the process