Reserving - ALAE

Question 2

Estimating ALAE: 3 common approaches

Answer 2

1. ALAE combined with claims to estimate claims and ALAE together
   - not good idea if ALAE has very different development pattern
2. use development technique on ALAE triangle directly
3. use ratio approach that develops ratios of paid ALAE to paid claims or rptd and use those ratios along with ultimate claims to project ultimate ALAE
   - assumes relationship between ALAE and claims is stable over the experience period

Question 3

Advantages of ratio approach

Answer 3

• recognizes inherent relationship between claims and ALAE
• development factors for ratio approach tend to be less leveraged than development factors based on ALAE dollars
• ratio produces ratios of ultimate ALAE to ultimate claims which can be used as diagnostic -> if ratio for particular year seems unreasonable, more reasonable ratio can be selected

Question 4

Disadvantages of ratio approach

Answer 4

• for some LOBs, may be claims with no claim payment but have substantial ALAE
• error in estimation of ultimate claims will lead to error in estimation of ultimate ALAE

Question 5

Additive development

Answer 5

• when using ratio approach, can choose to develop ratio triangle using either multiplicative LDFs or use additive approach
• with additive, subtract columns of triangle and determine additive age-to-ultimate amount
• steps: select factors as usual, calc ultimate factors by adding factors together instead of multiplying, and then multiply this ultimate factor to estimated ultimate paid claims to get estimated ultimate ALAE

Question 6

Additive Development: advantage

Answer 6

more stable if ratios are very small at early maturities