G.2. Expected Claims Method

Question 1

Expected claims formula for estimated ultimate claims

Answer 1

Estimated ultimate claims for AY YYYY = ELR x Earned Premium for AY YYYY

Estimated Ultimate Claims for AY YYYY = Expected Pure Premium x Earned Exposures for AY YYYY

Question 2

Assumptions of expected claims method

Answer 2

Ultimate claims for an exposure period can be better estimated based on an a priori estimate than using experience observed to date. Claims reported and paid to date tell you no useful information about ultimate claims.
(Also, assumption that a reasonable ratio can be obtained)

Question 3

Common uses of expected claims method

Answer 3

Entering new line of business
Operational or environmental changes make historical data irrelevant for projecting ultimates
Estimating ultimates at early maturities for long-tailed lines
No alternative method due to limited data

Question 4

Expected claims method (adv/disadv)

Answer 4

A: Provides stable estimate of ultimate claims
D: Unresponsive to recent experience

Question 5

2 challenges of using expected claims method

Answer 5

1. Determining appropriate exposure base

2. Estimating claims relative to that exposure base

Question 6

Steps to calculate expected claim ratio using expected claims method

Answer 6

1. Develop claims to ultimate
2. Calculate ultimate claim ratio for each year
3. Adjust claim ratios to be on the same rate levels as the year for which you are estimating ultimate claims
4. Select ratio

Question 7

How speedups/slowdowns in settlement impact expected claims

Answer 7

If it is in the most recent AY, estimates unaffected

Error will be in same direction as chain ladder, but to a lesser extent

Question 8

Changes in case reserve adequacy and expected claims method

Answer 8

If change started in an earlier year that is part of the expected claim ratio calculation, then error will be in the same direction as the chain ladder, but to a lesser extent

Question 9

Changes in claim ratios and the expected claims method

Answer 9

Would not react to changes to the claim ratio in the most recent year and as such, the method will be inaccurate

Question 10

Exposure growth and the expected claims method

Answer 10

Unaffected by exposure growth on its own, but changes in the average accident date will affect it
If average accident dates have changed for several years, impact will be there if it is calculated using chain-ladder

Question 11

Mix of business changes and the expected claims method

Answer 11

Impacted if either is true:
Segments of business that are changing have different expected claim ratios.
Segments of business have same expected claim ratios but have different development patterns AND this causes the estimate of the expected claim ratio from the historical data using a chain-ladder approach to be inaccurate.