CH-21 RUNOFF TRIANGLES

# We will use weighted average as development ratios with weights equal to cumulative claim values

# No discount rate is applied to the payments in different years because for much insurance
business the final payments on claims are expected to be made in few years. If claims are paid
quickly, there is less need to allow for discounting also this falls on prudence side of business

# Using grossing-up factors as they are used in this chapter is equivalent to taking an unweighted
average of the past years’ experience. Using development factors in the way they are used in this
chapter is equivalent to taking a weighted average of past experience, with the years with more
claims being weighted more heavily.

BASIC CHAIN LADDER METHOD

First the data needs to be cumulative to form the table below :

Development year
Accident year 0 1 2 3
2005 96 136 140 168
2006 100 156 160
2007 120 130
2008 136

Calculating Development factors :

Year 0 to Year 1 = ( 136+156+130 ) / ( 96+100+120 )=1.3354

Year 1 to Year 2 = ( 140+160 ) / (136+ 156 )=1.02739

Year 2 to Year 3 =168 /140=1.2

The lower half of the triangle can now be completed

Development year
Accident year 0 1 2 3
2005 96 136 140 168
2006 100 156 160 160 ×1.2=192
2007 120 130 130 ×1.027 ×1.2=160.274
2008 136 136 ×1.3354 × 1.027 ×1.2=223.915

So reserve is :

( 192−160 )+ ( 160.274−130 ) + ( 223.915−136 )=150.189

Assumptions :

(i) Payments from each origin year will develop in same way in monetary terms .
(ii) Weighted average of past inflation will be repeated in future .
 (iii) First year is fully run-off.

 CHAIN LADDER WITH INFLATION

Adjusting for past inflation gives us the following incremental claims at 2013 prices:

Incremental Development year

claims (in mid
2013 prices)
Accident year 0 1 2
2011 110 110 142
1430 × =1543.3
535 × =550
100 107
2012 110 811
1718 × =1766.17
107
2013 1912

The cumulative figure at 2013 Prices:

Cumulative Development year

claims (in mid
2013 prices)
Accident year 0 1 2
2011 1543.3 2093.3 2235.3
2012 1766.17 2577.17
2013 1912

We Now calculate development factors , they are :

2093.3+ 2577.17
Year 0 ¿ Year 1 : =1.4112
1543.3+1766.17
2235.3
Year 1 ¿ Year 2= =1.0678
2093.3
The projected cumulative figures at 2013 prices are :

Projected Development year

Cumulative
claims (in mid
2013 prices)
Accident year 0 1 2
2011
2012 2751.99
2013 2698.30 2881.34
The projected incremental figures at 2013 prices are :

Projected Development year

incremental
claims (in mid
2013 prices)
Accident year 0 1 2
2011
2012 174.82
2013 786.30 183.04

The projected incremental figures adjusted for future inflation are :

Projected Development year

incremental
claims (future
inflation
adjusted)
Accident year 0 1 2
2011
2012 113
174.82× =179.59
110
2013 113 117
786.30 × =807.74
183.04 × =194.69
110 110

The estimated reserves is the sum of these projected figures = 1182.02

Now Assumptions of Inflation – adjusted chain ladder method are:

(i) Payments from each origin year will develop in same way in real terms.

(ii) Rates of past and future inflation are appropriate.

(iii) The first year is fully run – off.

 AVERAGE COST PER CLAIM METHOD

The table below shows cumulative number of claims and total claim amount

Dividing each cell of cumulative total claim amount by the corresponding cell of cumulative
number of claims, we get cumulative average claim amount table as below:

Average cost of Development year

per claim
Accident year 0 1 2
2010 497 662 836
2011 588 803
2012 750

Assuming first origin year is fully runoff, we divide the number in first row by 836 to get
percentages: 59.45%, 79.186%, 100%.

So ultimate average cost per claim for Accident year 2011 is:

803
=1014
0.79186
We can now calculate percentage figures for Accident year 2011 (by dividing numbers in AY
2011 row by 1014) as 57.989%, 79.19%, 100%

For Accident year 2012, we take average of two previous figures for Development year 0:

1
¿ ( 59.45+57.989 )=58.772 %
2
So ultimate figure for Accident year 2012 is:

750
=1276.12
0.58772

Using same approach for claim number figures, we get:

Assuming first origin year is fully runoff, we divide the number in first row by 151 to get
percentages: 57.61%, 87.417%, 100%.

So ultimate number of claims for Accident year 2011 is:

156
=178.45
0.87417
We can now calculate percentage figures for Accident year 2011 (by dividing numbers in AY
2011 row by 178.45) as 65.56%, 87.42%, 100%
For Accident year 2012, we take average of two previous figures for Development year 0 :

1
¿ ( 57.61+ 65.56 )=61.585 %
2
So ultimate figure for Accident year 2012 is:

99
=160.75
0.61585
So expected total ultimate loss is:

836 ×151+1014 × 178.45+1276 ×160.75=512301.3

Subtracting claims paid till date, so outstanding reserves are:

512301.3−126310−125290−74250=186585

Now Assumptions of ACPC method are :

(iv) For Each origin year , number of claims in each development year is a constant
proportion of total number of claims in that origin year .

(v) For Each origin year ,average incurred cost per claim in each development year is a
constant proportion of total claims incurred in monetary term for that origin year .

(vi) The first year is fully run – off .

  BORNHUETTER -FERGUSON METHOD

# If loss ratio is not given then

Last DY of first AY
Loss ratio=
Premiumearned ∈that AY

We need cumulative incurred claims data

Development year
Underwriting year 0 1 2
2014 3215 6847 10078
2015 2986 7123
2016 4167

The initial ultimate liability at the end of year based on loss ratio are:

Underwriting year 2015 ¿ loss ratio ×earned premium=0.91× 12012=10930.92

Underwriting year 2016 ¿ loss ratio ×earned premium=0.91× 12867=11708.97

Now calculating development factors

The development factors are:

6847+7123
Year 0 ¿ year 1= =2.25286
3215+2986
10078
Year 1 ¿ year 2= =1.47188
6847
The emerging liabilities for each year are:

2015 :10930.92× 1− ( 1
1.47188 )
=3504.45

2016 :11708.97 × 1− ( 1
1.47188× 2.25286 )
=8177.87

So revised estimates of ultimate claims are:

2015 :7123+3504.45=10627.45
2016 :4167 +8177.87=12344.57
The total claims incurred for these three underwriting years are:

10078+10627.45+12344.57=33050.32
So outstanding claim amount for policies written in 2014 to 2016 is:
 33050.32−21186=11864.32

Assumptions of method:

(i) Payments from each origin year will develop in same way.
(ii) Weighted average of past inflation will be repeated in future
(iii) The first year is fully run-off
(iv) The estimated loss ratio is appropriate .

Statistical model

The general statistical model is :

C ij =r j s i x i + j +e ij

Where :

 i is the accident year

 j is the development year
 C ij is the incremental claim amount
 r j is the development factor for year j representing the proportion of claims paid by
development year j .
 si is a parameter representing the exposure ( for eg . claim amount/No of claims)
 x i+ j is a parameter varying by calendar year ( for eg . inflation)
 e ij is a error term .

Model checking

# We are given the following cumulative number of claims table:

Development year
Accident year 0 1 2 3
2009 17500 22500 24750 25500
2010 21000 27200 29950
2011 18800 24300
2012 21300

Calculating Development factors:

22500+27200+24300
From Development year 0 to 1 = =1.2914
17500+21000+18800
24750+29950
From Development year 1 to 2 = =1.1006
22500+27200
25500
From Development year 2 to 3 = =1.0303
24750
Now using these development factors and basic chain ladder method to calculate fitted claim
amounts for past years, we get:

Development year
Accident year 0 1 2 3
2009 17500 ( 17500∗1.2914 )=22600
( 22600∗1.1006 )=24774
( 24774∗1.0303 )=25524
2010 21000 ( 21000∗1.2914 )=27120
( 27200∗1.1006 )=27240
2011 18800 ( 29950∗1.1006 )=27240
2012 21300

Now Comparing fitted and actual incremental claims we have:

Development year
0 1 2 3
2009 Actual 17500 ( 22500−17500()24750−22500
=5000 ()25500−24750
=2250 )=750

Fitted 17500 ( 24774−22500()25524−24750

(22600−17500)=5100 =2274 )=754
Error 0 100 −24 −4
2010 Actual 21000
Fitted 21000
Error 0
2011 Actual 18800
Fitted 18800
Error 0
2012 Actual 21300
Fitted 21300
Error 0

As we can see that errors are not large and thus fit looks good however there are not many
categories of data so it is not clear whether it will provide satisfactory results in the future.