G.7 Berquist-Sherman Techniques

Question 1

2 ways to deal with operational changes when

estimating unpaid claims

Answer 1

1. Using data selection and rearrangement to isolate or
   neutralize the impact of the changes
2. Using data adjustment to restate historical data as if the changes never occurred.

Question 2

Examples of using data selection and rearrangement

to address operational changes

Answer 2

-Using earned exposures instead of claim counts when the definition of claim counts has changed.
-Using policy year data instead of accident year data when policy limits have significantly changed between policy years.
-Using report year data instead of accident year data when social or legal climate changes cause severity to correlate closer with report date than accident date.
-Using shorter time periods when the average accident date has changed over time.

Question 3

When subdividing triangles by size of loss would be

useful

Answer 3

If there was a shift in emphasis in the claims department

between handling small versus large claims.

Question 4

Purpose of Berquist-Sherman techniques

Answer 4

The Berquist-Sherman techniques can be used to adjust
triangles for changes in claim settlement rates and/or case reserve adequacy. After the adjustments, all years in the adjusted triangles will have the same settlement rates and/or case reserve adequacy so the regular development methods can then be used on the adjusted triangles to produce estimates.

Question 5

Assumptions of the paid B-S technique

Answer 5

1. Changes in disposal rates are due to speedups or
   slowdowns in settlement rates.
2. Higher disposal rates are associated with a higher
   percentage of ultimate paid claims.

Question 6

Assumption of the reported B-S technique

Answer 6

Any differences between the annual changes in average case reserves at each maturity and the severity trend are due to changes in case reserve adequacy.

Question 7

Challenges in using paid loss data to obtain the

severity trend for the reported B-S technique

Answer 7

It assumes that the average paid severity is only changing because of the severity trend (and not things like shifts in the prioritization between large and small claims).

Additionally, for lines like medical malpractice:
1. Limited paid data at early maturities to calculate paid
severity.
2. Trends can be distorted by irregular settlements and
variation in the rate of claims closed without payment.

Question 8

The advantage of using the latest diagonal as the

common level for B-S techniques

Answer 8

It has the advantage that the adjusted paid or reported

triangles would have the latest diagonal remain unchanged from the unadjusted paid or reported triangles.