Method of Estimation
Various statistical methods have been established for the calculation of outstanding claims reserves in general insurance. These include:
- Distribution-free chain ladder method
- Over-dispersed Poisson (ODP) model
- Hertig's log-normal chain ladder model
- Separation method
- Average cost per claim methods
- Bornhuetter-Ferguson method
- Paid-incurred chain (PIC) claims reserving model
- Bootstrap methods
- Bayesian methods
(see Benjamin (1987), Taylor (2000), England-Verrall (2002) and Wüthrich-Merz (2008))
Most of these methods started off as deterministic algorithms. Later actuaries started to develop and analyze underlying stochastic models that justify these algorithms. Probably, the most popular stochastic model is the distribution-free chain ladder method which was developed by T. Mack (1993). These stochastic methods allow to analyze and quantify the prediction uncertainty in the outstanding loss liabilities. Classical analysis studies the total prediction uncertainty, whereas recent research (under the influence of Solvency 2) also studies the one-year uncertainty, called claims development result (CDR), see Merz-Wüthrich (2008). Good overviews provide England-Verrall (2002) and Wüthrich-Merz (2008).
Read more about this topic: Outstanding Claims Reserves
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