G.5 Frequency-Severity Techniques

Question 1

Assumptions of frequency-severity techniques

Answer 1

The 3 main assumptions of frequency-severity methods are:
1. Claim counts and severities will continue to develop in
future periods as they have in past periods.
2. Consistent definition of claim counts throughout the
experience period.
3. The mix of types of claims is relatively homogeneous.

The disposal rate technique has the additional assumption that there are no significant partial payments (i.e., claims are paid when they are closed).

Question 2

Advantages of frequency-severity techniques

Answer 2

-The disposal rate technique only uses paid data, so it isn’t impacted by changes in case reserve adequacy.
-Assumptions about inflation and expected claim disposal rates can be explicitly incorporated into the methods.
-Gain greater insight into the claims process by understanding the rate of claim reporting and settlement
and average dollar value of claims separately.

Question 3

Disadvantages of frequency-severity techniques

Answer 3

-Estimates are highly sensitive to the assumed trend rate.
-Changes in the definition of claim counts impact the
estimates.
-Changes in claim reporting or processing impact the
estimates.
-The methods require a relatively homogeneous mix of
claims.
-The data may not be available (i.e., claim counts may be
unavailable).

Question 4

Formula to calculate incremental closed claim counts

using the disposal rate technique

Answer 4

Incremental claim counts closed between y1 and y2 for AY =
((Ultimate claim counts for AY - Closed counts at latest diagonal for AY) / (1 - selected disposal rate at latest diagonal ))
x (disposal rate at y2 - disposal rate at y1)

Question 5

Considerations for the maturity age to begin the tail

and combine data for the tail severity

Answer 5

-Combine data at the age at which results become erratic, since combining the data may provide more stability.
-The influence on the total projections of selecting a
particular age. If the impact on the total estimate is very
small, more refined analysis may not be necessary.
-The percentage of claims expected to be closed beyond the selected age. Enough claims should be there to provide a more stable severity estimate when grouped, but not too many claims since some should remain to provide estimates for earlier maturities where the age-to-age factors are more stable.

Question 6

Assumptions of case outstanding techniques

Answer 6

1. Development of future claims will be similar to
   development in prior periods.
2. Case outstanding to date provides useful information about future claims development.

Additionally, all the same assumptions from the development technique also apply here (consistent claims processing, consistent mix of claims, stable policy limits and deductibles, etc.).

Question 7

When case outstanding techniques are most useful

Answer 7

-When looking at report year triangles.
-For claims-made policies, since there is no pure IBNR.
-When looking at accident year triangles, but nearly all
claims are reported by the first column of the triangle.
-The 2nd approach is useful when only current case
outstanding data is available so other techniques cannot be used.

Question 8

Disadvantages of case outstanding techniques

Answer 8

-In most lines of business, case outstanding do not provide sufficient information about pure IBNR.
-There is a lack of industry benchmark data for accident year applications of this method.
-It is not intuitive as to what paid-on-case and
remaining-in-case ratios are appropriate at each maturity
including the tail.
-The projections can be distorted by case reserves for large losses.
-The 2nd approach depends on industry CDFs, which may not be appropriate for the particular self-insurer.
-The CDFs for the 2nd approach may be highly leveraged for immature years, making estimates highly volatile.

Question 9

Formula for case O/S development factor for case

outstanding method #2

Answer 9

Case O/S Dev Factor = 1 + ((ReptCDF