PPOs cannot be projected within triangles like with traditional settlements as the payments will distort the development. Can someone please provide an explanation for above core reading. Thanks
Write down what you think a typical run-off pattern would look like for a typical PPO (let's say on a motor claim). Then do the same for a typical motor attritional claim. Compare the two - there's your answer!
I tried what you have suggested but it was not as obvious or clear to me as you suggested. Thinking hard, the underlying assumption of chain-ladder and BF method is past development pattern is good guide to future. But since PPO by nature are indexed and unless we are in a very stable environment, which we never are. No two PPOs paid development factors will match if they are awarded in different years even if using same index.
ok, tell me what you've got as your PPO paid claim pattern, and your attritional paid claim pattern, and let's look at the difference. (Yes, future=past is the assumption for CL methods - but if you've got different patterns with different types of claims, then one pattern can distort the total triangle.)
My typical PPO paid triangle is where I assumed first payment of GBP 25K, frequency of every six months. Payment for 40 years. Paid value keep increasing in every six months because of indexation. Created a similar example for paid attrition claim, development period every six month. Assumed full payment in 4 years. Following is % of payment over 4 year 10%, 20%, 20%, 20%, 10%,10%,5%,5%. If look at development factors for two claims, PPOs first 12 month development factor start from 2+ and gradually goes close to 1. And similarly for attritional, we starte with 3 and goes close to 1. Still can not spot the distortion point from payment in PPO.
Think of it this way: Let's say you have an attritional triangle. You project claims no problem. Now let's say you add a whole load of PPO claims into that triangle. As you've said, these don't have the same payment pattern. So you're new chain ladder estimate will be based on a mix of the PPO profile and the attritional profile. The result is that the new profile will be too long for the attritional claims and too short for your PPO claim.
I think also Zenji, that your chosen payment pattern for your attritional claim is pretty slow and unusual for motor (and so not very dissimilar to your PPO profile). Most attritional motor claims will be far shorter tail than this, and often paid in one or two settlements - the exception being perhaps the BI claims involving whiplash or similar.
