G.2 Expected Claims Method Flashcards
Expected Claims Formula for Estimated Ultimate
Claims
Estimated Ultimate Claims for AY YYYY = Expected Claim
Ratio x Earned Premium for AY YYYY
Estimated Ultimate Claims for AY YYYY = Expected Pure
Premium x Earned Exposures for AY YYYY
Assumptions of Expected Claims Method
The main assumption is that ultimate claims for an exposure period can be better estimated based on an a priori estimate than using the experience observed to date for that exposure period. Another way of stating this is that the claims reported and paid to date for that exposure period tell you no useful information about your ultimate claims for that exposure period. A secondary assumption is that a reasonable expected claim ratio can be obtained.
Common uses of Expected Claims Method
-When entering a new line of business, as there is insufficient data to obtain historical development factors.
-When operational or environmental changes make
historical data irrelevant for projecting ultimate claims
(e.g., expanded coverage due to a recent court decision).
-When estimating ultimates at early maturities for
long-tailed lines of business where the early age-to-ultimate factors are highly leveraged.
-When data is unavailable so other methods cannot be used.
Advantage and disadvantage of Expected Claims
Method
This method has the advantage of providing a stable
estimate of ultimate claims, but the disadvantage of being unresponsive to recent experience.
2 challenges of using the Expected Claims Method
- Determining the appropriate exposure base.
2. Estimating claims relative to that exposure base.
Why we exclude the data for the year for which we
are calculating ultimates in calculating the expected
claim ratio when using the Expected Claims method
Because using that data would violate the main assumption
of the Expected Claims method.
Briefly describe the steps for calculating the expected
claim ratio using the Expected Claims method
- Develop claims to ultimate for each year of historical
experience (usually using the chain-ladder method to
obtain ultimate claims). - Calculate the ultimate claim ratio for each year of historical experience by dividing ultimate claims by earned premium.
- Adjust the historical claim ratios to be on the same rate, tort reform, loss trend, premium trend, and exposure trend (if the exposure base is inflation sensitive) levels as the year for which you are estimating ultimate claims.
- Select an expected claim ratio based on the adjusted
historical claim ratios (perhaps by taking some sort of
average - usually a straight average is used).
How speedups or slowdowns in settlement impact
the Expected Claims method
The Expected Claims method is unaffected by these changes to the extent that the expected claim ratio is not impacted.
-If the speedup or slowdown started in the most recent
accident year, which is not part of the expected claim
ratio, then the estimates produced by this method will be
unaffected by the change and will be accurate.
-If the speedup or slowdown started in an earlier year that is part of the expected claim ratio calculation, then the error produced by this method will be in the same direction as the chain ladder method, but to a lesser extent. Note that the expected claim ratio will only potentially be impacted if it is calculated based on paid claim data, since reported claim triangles would be unaffected by speedups or slowdowns in settlement.
How changes in case reserve adequacy impact the
Expected Claims method
The Expected Claims method is unaffected by these changes
to the extent that the expected claim ratio is not impacted.
-If the change in case adequacy started in the most recent accident year, which is not part of the expected claim ratio, then the estimates produced by this method will be unaffected by the change and will be accurate.
- If the change in case adequacy started in an earlier year that is part of the expected claim ratio calculation, then the error produced by this method will be in the same direction as the chain ladder method, but to a lesser extent. Note that the expected claim ratio will only potentially be impacted if it is calculated based on reported claim data, since paid claim triangles would be unaffected by these changes.
How changes in claim ratios impact the Expected
Claims method
The Expected Claims method would not react to any changes in claim ratio in the most recent year since the method is not responsive to these changes. As such, the method will be inaccurate in these situations.
How exposure growth impacts the Expected Claims
method
The Expected Claims method is unaffected by exposure
growth on its own. If there are changes in the average
accident date because of the exposure growth, then:
-The Expected Claims method will still be accurate if the
average accident date change only started in the most recent year (which doesn’t impact the expected claim ratio).
-If the average accident dates have changed for several
years, then the expected claim ratio will be impacted if it
is calculated based on historical data using the chain-ladder approach. The error produced by this method will be in the same direction as the chain ladder method, but to a lesser extent.
How mix of business changes impact the Expected
Claims method
When you have a changing mix of business, the Expected Claims method will be impacted if either of the following are true:
-The segments of the business that are changing have
different expected claim ratios. This would have the same
effect as a change in claim ratio, mentioned above.
-The segments of the business that are changing have the same expected claim ratios but have different development patterns, AND this causes the estimate of the expected claim ratio from the historical data using a chain-ladder approach to be inaccurate.
