Section 4 Part 2

Front 1

4 methods of aggregating loss data

Back 1

Calendar year, accident year, policy year, and report year

Front 2

Calendar Year Aggregation:

Back 2

Considers all loss transactions that occur in a 12 month calendar year from January 2 to December 31

Front 3

Accident Year Aggregation:

Back 3

Considers all loss transactions for accidents that occur within a 12 month period regardless of the policy issuance date or the claim report date

Front 4

Policy Year Aggregation

Back 4

Considers all loss transactions for policies that are issued within a 12 month period regardless of the accident occurrence date or claim report date

Front 5

What are paid losses?

Back 5

Losses that have already been paid to claimants

Front 6

What are case reserves?

Back 6

An estimate of the remaining amount of money needed to ultimately settle a claim

Front 7

What are incurred losses?

Back 7

The sum of paid losses and the current case reserve

Front 8

General strategy to estimate loss reserves:

Back 8

Project ultimate losses and then subtract losses paid to date

Front 9

Formula for loss reserve:

Back 9

Loss Reserve= Estimated Ultimate Losses- Losses Paid to Date

Front 10

What is an ultimate loss?

Back 10

The total amount an insurer pays for a fully developed claim

Front 11

Formula for the IBNR reserve:

Back 11

Estimated Ultimate Losses- Losses Incurred to Date

Front 12

What is the difference between the Loss Reserve and the IBNR reserve?

Back 12

The case reserve (remember that incurred losses are losses paid to date + case reserve)

Front 13

3 methods of loss reserving:

Back 13

ELR, CL, and BF

Front 14

What is the loss ratio?

Back 14

The ratio of losses to premium (it is the percentage of the premium that the insurer pays out in losses)

Front 15

When is the best time to use the expected loss ratio?

Back 15

On a new line of business when there is limited claims data

Front 16

Two other names for the Chain Ladder Method:

Back 16

Loss development triangle method and loss triangle method

Front 17

Chain Ladder Description in words

Back 17

It observes patterns in historical loss development and assumes that future losses will continue to develop in a similar manner

Front 18

Why is the chain ladder method called the loss development triangle method?

Back 18

Because the data is arranged in a triangle

Front 19

What is the goal of the chain ladder method?

Back 19

To project values for the lower triangle (the empty cells)

Front 20

What do the rows in the CL method represent?

Back 20

Accident Years (the payments made on claims from the accident year. But all the payments were not all made in 2012)

Front 21

What do the columns in the CL method represent?

Back 21

The age of the claim

Front 22

What do the diagonals of the CL method represent?

Back 22

The calendar years

Front 23

What kind of losses do you need for the CL method?

Back 23

You need cumulative losses!

Front 24

In l(i,k), what does the subscript i represent?

Back 24

The accident year

Front 25

In l(i,k), what does k represent?

Back 25

The development year

Front 26

What does a loss development factor of 1.017 represent?

Back 26

We can expect the cumulative losses to grow roughly by 1.7%

Front 27

What does a loss development factor of 1.028 represent?

Back 27

We can expect losses to grow roughly 2.8% YOY

Front 28

Age to age factor/loss development factor formula

Back 28

f(i,k) = L(i,k)/L(i,k-1)

Recall i is the accident year and k is the development year. It’s really just dividing the cumulative losses

Front 29

What is the product of all the age to age factors called?

Back 29

Age to Ultimate Factors

Front 30

True or False: we can estimate the ultimate losses by by developing incurred loss data

Back 30

True- (incurred losses= current losses + reserve)

Front 31

True or False: in theory incurred losses should equal paid losses at the end of loss development.

Back 31

True (reserves are 0 at paid losses since all the losses are paid and there’s nothing to pay)

Front 32

What do we subtract ultimate losses by to calculate loss reserve?

Back 32

Losses paid to date

Front 33

What do we subtract ultimate losses by to calculate IBNR reserves?

Back 33

Losses incurred to date

Front 34

What is a disadvantage of the CL method?

Back 34

Relies heavily on historical data and claims

Front 35

True or False: the expected loss ratio only considers losses that have been fully developed? So it does not rely on historical data

Back 35

True

Front 36

BF reserve in words:

Back 36

It’s the product of the proportion of unpaid claims and ultimate losses. This gives the reserve