Paid vs. incurred modelling for triangulation

Discussion in 'SP7' started by Smith, Jun 14, 2020.

  1. Smith

    Smith Very Active Member

    Page 36, Chapter 15, when talking about the reasons why the reserves resulting may be different for paid claims or incurred claims basis applied, would like to consult with,
    in my opinion, the underlying difference between paid claims and incurred claims basis is that incurred claims include some estimation while paid claims do not. Then, the maybe different reserve resulting is actually due to the estimation included within the incurred claims used might change, inappropriate against they initially made. Am I right?
  2. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    This is essentially what the last bullet point on page 36 is saying "changes to case reserving procedures over time".

    Of course if you know that the case reserving philosophy has changed over time, you could seek to adjust your incurred claims triangles / development pattern to allow for this and hence try and remove the distortion.

    The fundamental point here is that whether you project using paid or incurred data you are still trying to estimate the same reserve. However, because the paid and incurred claims develop differently, you would normally expect to get different estimates of that reserve. You then need to apply judgement to decide on your "final" estimate.
  3. Smith

    Smith Very Active Member

    Sorry, maybe I did not express my thoughts clearly due to the words used, it seems you did not catch what I said, that, I mean the difference between paid claim and incurred claim is the latter includes estimate component than the former, and the estimate may develop differently from expectation. So I mean, it's the variation of th estimate component of incurred claim that results in the difference ulttimate reserves from that using paid claim which do not include such component, am I right?
  4. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    Hi - sorry if I didnt understand you previously.

    You are correct when you state that the incurred claims include an estimate (of the outstanding amounts) and the paid claims do not.

    I am not entirely sure what you mean when you say that "the estimate may develop different from expectation". If you mean there is a subsequent change in the estimation process over time, which differs to how estimates have been set previously and this was not anticipated (and hence reflected in the development pattern based on previous years), then that is basically a change to the case reserving procedures over time. The case reserving procedures are the processes the insurer uses to sets it estimates (or case reserves) - ie the outstanding components of the incurred claims.
  5. Smith

    Smith Very Active Member

    Ha! I got what you mean. thanks a lot!

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