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Reserving for Incomplete Accident Years

Reserving for Incomplete Accident Years. Nancy P. Watkins Milliman & Robertson, Inc. CLRS - September 28-29, 1998. Reserving for Incomplete Accident Years. Refers to the evaluation of loss reserves as of a date other than December 31

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Reserving for Incomplete Accident Years

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  1. Reserving for Incomplete Accident Years Nancy P. Watkins Milliman & Robertson, Inc. CLRS - September 28-29, 1998

  2. Reserving for Incomplete Accident Years • Refers to the evaluation of loss reserves as of a date other than December 31 • Does not refer to the projection of December 31 loss reserves based on data through a different evaluation point

  3. Why Reserve for Incomplete Accident Years? • Internal reporting to management: • How are we doing year-to-date? • External reporting: • Shareholders • Regulators

  4. Why Reserve for Incomplete Accident Years? • Special situations: • Rate review • Merger or acquisition • New company • New line of business • Line of business in runoff • Company fiscal year different from calendar year

  5. General Approach to Incomplete Accident Years • Can start with previous year-end review (Scenario I) and make adjustments to accident year methods (Scenarios II, III) • Can apply same methods to regrouped data (Scenarios IV, V and VI)

  6. General Approach to Incomplete Accident Years • “Methods” can refer to: • Losses or ALAE as underlying data • Paid or reported loss development • Paid or reported Bornhuetter-Ferguson • Claim counts and average severities • Many other methods as well

  7. Examples of Methods: Scenario II • For complete years (1990-96), use same LDFs and ultimates as for previous year-end review (Scenario I) • For incomplete year (1997), use Loss Ratio Method, with selected ultimate loss ratio based on prior years • Subtract reported loss as of evaluation date to derive estimated IBNR

  8. Examples of Methods: Scenario III • For complete years (1990-96), use interpolated LDFs based on LDFs from previous year-end review; apply to losses as of evaluation date • For incomplete year (1997), estimate a LDF based on some formula applied to 12-ultimate LDF; or • For incomplete year (1997), use Loss Ratio Method, with selected ultimate loss ratio based on prior years

  9. Examples of Methods: Scenario IV • Regroup data into accident quarters evaluated at 3 months, 6 months, 9 months, etc. • Apply method to accident quarters in same way as to accident years

  10. Examples of Methods: Scenario V • Regroup data into accident years evaluated at 9 months, 21 months, 33 months, etc. • Apply method to regrouped accident years in same way as to accident years at 12, 24, etc. except • Ultimate loss for incomplete accident year (1997) must be adjusted to exclude future exposures (4th quarter 1997)

  11. Examples of Methods: Scenario VI • Regroup data into fiscal-accident years (10/1/x - 9/30/x+1) evaluated at 12 months, 24 months, 36 months, etc. • Apply method to regrouped fiscal-accident years in same way as to accident years • Ultimate loss for incomplete accident year (1997) does not need to be adjusted to exclude future exposures (4th quarter 1997)

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