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Development

Reasons for changes in Loss Triangles

  • Case Reserve Adequacy
  • Settlement Rates
  • Mix of business
  • Growing / Shrinking book of business
  • Tort Reform
  • Occurrence of one or more large claims

Chain Ladder Method

Assumptions

  1. Future claims development will be similar to development in prior periods.
    • The same factors (derived from past development periods) are used in future development periods.
  2. Claims observed for an immature period tell you something about claims yet to be observed.
    • The last row is used in calculation (as the base for the factors to be multiplied with).

Impact of Changes

  • Case Reserve Adequacy

    • Setting Higher/Lower case reserves starting from a Calendar Year (CY).
    • Reported Claims Method is NOT affected by changes in Loss Ratios (LR), but only by changes in case reserves.
      • NOTE: Shaded in ==gray== are new claims.
      • If we set higher case reserves starting from Accident Year (AY) 2014 (i.e., $165,000), this impacts new claims only.
      • Here, when we calculate the Cumulative Development Factor (CDF) from the prior periods (2 x 1.25 x 1.08 x 1.019 = 2.750 for 12-ultimate), we get ==$453,750==, which is a big overestimation!
      • If we set higher case reserves starting in AY 2012 (i.e., $165,000), this affects new and existing claims. In this case too, we will end up overestimating ultimate losses for each of the AYs 2011-2014.

  • Settlement Rates

    • Speedup (Slowdown) leads to Overestimation (Underestimation).
    • Reason (for Speedup-overestimation): Historical dollar values for each period increased gradually. So, they gave CDFs which were bigger in value compared to if there was a speedup in settlement rates. Due to a speedup, the initial claims for the starting of an AY will be larger, thus, the bigger CDF and the larger initial claim paid will explode the ultimate value (overestimation).
    • Loss / Paid Claims Method is NOT affected by changes in Case Reserve Adequacy (CRA), but only by changes in settlement rates.
    • Wording
      • ...would overestimate since it would apply historical development patterns that were based on less adequate Case Reserves to the now higher reported claims.

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