PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

478 A NEW METHOD OF ESTIMATING LOSS RESERVESto better fit the data from the later years in Tables 7 and 8 thanthe uniform random split.6. SUMMARY AND CLOSING COMMENTSFor new lines of business, the practical approach to loss reservingrequires the actuary to make his/her best guess of the reservelevel based on prior knowledge. The actuary’s guess maybe based on a simple loss ratio reserving method together with arough conservative guess as to the development pattern (possiblybased on the experience from some other similar business). Thispaper provides reserving actuaries with a tool to assist them withtheir “best guess” of the reserves, especially in the early years ofdevelopment. The method essentially uses an a priori pattern inthe table of expected loss development factors to determine theloss reserves. The pattern of expected loss development factorsis independent of the distribution of the cumulative incurred lossin the accident year and can be varied depending on the actuary’sestimate of the length of the claim settlement period, andthe random split used.When there is a sufficiently large amount of data in the lossdevelopment triangle, the actuary can use the method of thispaper to generate tables of expected loss development factorsto see which ones match the observed loss development factors.The best matched tables can be used to estimate the loss reserves.In closing, there are several important attributes of thismethod:1. It can be used for new and old business.2. It can be used in conjunction with other methods suchas the Bornhuetter-Ferguson method.3. It makes no assumptions about the underlying distributionof the ultimate losses.