Hi In chapter 14, page 21, the 3rd bullet pt mentions that if we use a net triangle to derive the distribtuion for net (of reinsurance) cliams, and if reinsurance retentions are increasing for more recent origin periods, then this method will underestimate volatility (and overstate if retentions are increasing). Why is this? Thanks
The chain ladder method assumes that past volatility is a good guide to the future. However, the fact that less reinsurance is being purchased means that volatility will be increasing. Since the chain ladder method makes no allowance for this, it will underestimate volatility.
