I
iActuary
Member
This is usually not covered when we talk about reserving. But in practice, regulators normally require to reserve for this. So I thought you guys can give me some thoughts about it!
As far as I am aware, there are two commonly used approaches:
1) Classical (traditional) approach, or called "paid-to-paid ratio method";
2) Kittel approach (a refined approach based on (1)).
Now, I am trying to understand the logic of a newly seen (at least to me) approach used in the industry. This is described as below:
First step - Derive the ULAE ratio by dividing the actual claims-related expenses by the best estimate of claim liability held at the beginning of financial year.
Second step - Apply the ratio to the best estimate of claim liability held at the end of financial year to derive the indirect claims expense provision as at the valuation date.
In my understanding, this approach somehow projects only the claims expense expected to be incurred for the next financial period, not the total expense expected to be needed to settle all the outstanding claims. Am I missing something? Could someone help me please?
Thanks a lot.
BTW, I suggest this topic to be included in the ST7 notes in the future.
As far as I am aware, there are two commonly used approaches:
1) Classical (traditional) approach, or called "paid-to-paid ratio method";
2) Kittel approach (a refined approach based on (1)).
Now, I am trying to understand the logic of a newly seen (at least to me) approach used in the industry. This is described as below:
First step - Derive the ULAE ratio by dividing the actual claims-related expenses by the best estimate of claim liability held at the beginning of financial year.
Second step - Apply the ratio to the best estimate of claim liability held at the end of financial year to derive the indirect claims expense provision as at the valuation date.
In my understanding, this approach somehow projects only the claims expense expected to be incurred for the next financial period, not the total expense expected to be needed to settle all the outstanding claims. Am I missing something? Could someone help me please?
Thanks a lot.
BTW, I suggest this topic to be included in the ST7 notes in the future.