Filing at a Glance General Information - Delaware Insurance ...

Loss Development
ADJUSTMENTS TO LOSSES
Attachment II
Page 3
As in past filings, accident year incurred losses are developed for the liability coverages, and
accident year paid losses are developed for the physical damage coverages. Allstate's standard
loss development procedure is to select ultimate accident year losses after analyzing estimates
developed using the Link Ratio and Additive methods. Accident year incurred losses are
developed for the liability coverages. Accident year paid losses are developed for the physical
damage coverages.
While the link ratio method assumes that future development is proportional to losses that have
already emerged as of a given evaluation date, the additive method assumes that future
development is proportional to the number of earned exposures in the accident period, where the
expected development per exposure is based on historical development patterns per exposure
adjusted to account for differences in frequency and severity over time. Allstate believes the
approach of considering two loss development procedures when estimating ultimate losses better
upholds the suggestion contained in the Statement of Principles Regarding Property and Casualty
Loss and Loss Adjustment Expense Reserves that “Ordinarily the actuary will examine the
indications of more than one method when estimating the loss and loss adjustment expense
liability for a specific group of claims.”
To calculate estimated ultimate losses using the Link Ratio methods, historical age-to-age link
ratios are calculated, which represent loss development between different evaluation periods. An
average of the historical link ratios is then used to estimate the ultimate level of paid losses to be
used in ratemaking. This method assumes that historical loss development patterns can be used
to estimate future loss development on current immature claims.
For the Additive loss development method, historical losses are first trended to today’s price
level using pure premium trends selected from Allstate Indemnity Company data. This is done
to avoid distortions due to changes in the underlying loss costs. Please note that due to the
different lengths of trend periods in each analysis, the selected pure premium trend that is used in
loss development often differs from the selected trend that applies to the underlying data.
Trended additive amounts per exposures are calculated, which represent trended loss
development between different evaluation periods. An average of the historical trended additive
amount per exposure is then used to estimate the ultimate trended level of paid losses. Trended
age-to-ultimate additive amounts per exposure are multiplied by earned exposures for each
accident year to calculate trended losses that have yet to emerge. A final step in the Additive
Method is to detrend the trended losses yet to emerge. Losses are detrended because the
application of trend is accounted for in a separate step in the ratemaking process. This method
assumes that historical loss development patterns per exposure can be used to estimate future
loss development on current immature claims.
Refer to Exhibits 3.1 through 4.6 of Attachment III for the loss development of each coverage
using both the Link Ratio and Additive Methods of loss development. A summary of the
estimated ultimate losses using each method as well as the selected ultimate losses is shown on