G.5. Frequency-Severity Techniques

Question 1

Assumptions of F-S techniques

Answer 1

1. Claim counts and severities will continue to develop as they have in the past
2. Consistent definition of claim counts throughout the experience period
3. Mix of types of claims is relatively homogeneous

(Disposal rate technique has additional assumption that there are no significant partial payments)

Question 2

Advantages of F-S techniques

Answer 2

Disposal rate technique only uses paid data, so it is not impacted by case
Assumptions about inflation and expected claim disposal rates can be explicitly incorporated into the methods
Gain greater insight into the claims process

Question 3

Disadvantages of F-S techniques

Answer 3

Estimates are highly sensitive to assumed trend rate
Changes in definition of claim counts impact estimates
Changes in claim reporting or processing impact estimates
Requires relatively homogeneous mix of claims
Data may not be available

Question 4

Considerations for the maturity age to begin tail severity

Answer 4

Combine data at the age results become erratic
If impact on total estimate is very small, refined analysis may not be necessary
Percentage of claims expected to be closed beyond selected age. Enough to provide more stable estimate when grouped, but not too many claims

Question 5

Formula to calculate incremental closed claim counts using disposal rate technique

Answer 5

Incremental claim counts = (Ultimate for AY - closed at latest diagonal for AY) / (1 - selected disposal rate at latest diagonal) x difference in disposal rates