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Loss Reserve Range or Distribution, CLRS September 2005

This article discusses various methods used to estimate loss reserve ranges or distributions, including incurred development, payment development, pure loss rate projection, and Bornhuetter-Ferguson methods. The importance of considering variation and confidence levels in estimating loss reserves is also highlighted.

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Loss Reserve Range or Distribution, CLRS September 2005

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  1. Loss Reserve Range or Distribution, CLRS September 2005 Loss Reserves Points, Ranges or Distributions CLRS September, 2005 Presented by: Gregory Alff, FCAS, MAAA Senior Actuary, Willis

  2. Loss Reserve Range or Distribution, CLRS September 2005 For the current year if aged 10 months or more we likely use incurred development, payment development, pure loss rate projection – and Bornhuetter-Ferguson Methods, combining development and loss rate projections It is often clear that the estimates of one or more of the separate methods should be eliminated as biased high or biased low So by this means we arrive at a best estimate for the current year

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  7. Loss Reserve Range or Distribution, CLRS September 2005 The client is told that this estimate is an estimate near the center of a range of estimates Many clients are now understanding the importance of variation around the mean and are asking for confidence levels >> Some to book financial losses at a higher confidence level Auditors also want to know confidence levels >>> Auditors may be willing to accept booking at a 60 to 70% confidence level when losses are green – but are concerned about manipulation of financial results

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  14. Loss Reserve Range or Distribution, CLRS September 2005 The Challenge We can arrive at statistically reasonable estimates of confidence levels for the current year However As losses are paid for completed years there is not a statistical method, of which either Dr. Risko or I am aware, to define the reduction in variation around the current mean estimate as claims are closing Currently we use an estimation, mainly judgmental to reduce the variation between confidence levels as policy periods age

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