Development Method + Expected Claims Technique

Question 1

When does Loss Development Technique work well?

Answer 1

• Short Tail Lines (low leverage)
• Credible volume of data and a stable environment
• Deteriorating/Improving claims ratios, Responsive to claims activity

Question 2

When is Loss Development Technique Distorted?

Answer 2

• Case Reserve Adequacy changes impact reported loss development method
  – Strengthening = overstate ultimates
  – Weakening = understate ultimates
  – Paid loss development method not effected
• Settlement Rate changes impact both paid/reported loss development methods
  – Speed Up = Overstate ultimates
  – Slow down = Understate ultimates
• Changes in product mix or claim mix
  – Shift to longer tail exposure = understate ultimates
  – Shift to shorter tail exposure = overstate ultimates

Question 3

Most common exposure bases in Expected Claims technique

Answer 3

• Earned Premium
• Payroll
• # of Vehicles
• Sales
• Property Values

Question 4

Objective of the Expected Claims Technique

Answer 4

Estimate claims for the most recent year

Question 5

What do historic losses need to be adjusted for?

Answer 5

• Inflation
• Tort Reform

Question 6

Pros of the Expected Claims Technique

Answer 6

– Stability of estimates (not affected by blips in interim experience)
– Allows actuary to judgmentally anticipate the impact of changes in the environment (where those changes are not yet evident in the data)

Question 7

Cons of the Expected Claims Technique

Answer 7

– Not responsive to actual claims experience
* Inaccurate when actual claims experience differs from the expected

Question 8

When is the Expected Claims Technique appropriate to use?

Answer 8

• An insurer enters a new line of business or a new territory
• Operational or environmental changes make recent historical data irrelevant
• Where development methods are too highly leveraged (lines with longer
  emergence and settlement patterns)
• Data is unavailable for the other methods

Question 9

When does Expected Claims Technique work well?

Answer 9

• Claims ratios / loss rates are stable and predictable
  – Even if case reserve adequacy or settlement rates are changing
• Used for early evaluations of long tail lines
• Used in situations development data doesn’t exist or can’t be relied upon

Question 10

When does Expected Claims Technique not work well?

Answer 10

• Claims ratios / loss rates come in different than expected
  – Not responsive to actual claims experience in the year
  – Product mix changes
  – Shifts in the types of claims