Chapter 14: Section 1.4 [2011]

Discussion in 'SP8' started by jensen, Nov 13, 2011.

  1. jensen

    jensen Member

    Hello

    In the example given right before subsection "Source of development pattern", Method 2 develops the case estimates as opposed to incurred.

    May I know how do we derive such factors in practice? My understanding is that the case estimates get smaller with each development year, so am I right to say the development factor derived from case estimates are less than 1?

    Thanks.
     
  2. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    Development factors are usually derived from past data (looking at triangulations, for example). They are covered further in Subject CT6 and ST7.
    If you have no past data or it's unreliable, then benchmarks can be helpful.

    Case estimates (ie estimates of outstandings) will probably get smaller over time, as more of the estimates become paid. So yes, development factors year-on-year would be less than one. Often, though, a claims development pattern would project "paid+outstanding" to ultimate, in which case you'd normally get factors greater than one unless (amongst other things) case estimates have been over-estimated. Of course it also depends whether or not you're including IBNR in your projection (method 3 in the notes).
     
  3. Jammy

    Jammy Very Active Member

    Hi,
    What do we mean by these 'benchmarks'?

    Are these benchmarks for absolute losses? Or development factors? Or anything else?
     
  4. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    Absolute values aren't very helpful, since the size of your business will be smaller than the industry-wide figure. So here we're talking about development patterns (ie link ratios, or percentages developed in each development period).
     
    Jammy likes this.

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