Insurers, do you consistently ask yourself: How do I know that the reserving methods I am currently using are the “best”? How do I decide when to change methods?
In this article, we will discuss the four universally known and used reserving methods in the actuarial world that you need to master: Chain Ladder, Bornhuetter-Ferguson, Average Cost and De Vylder.
The four non-life reserving methods you need to master throughout your actuarial career
Method N°1: Chain-Ladder
The First and Most Important Reserving Method for P&C Insurance
- Overview: The Chain-Ladder Method is the most widely used reserving technique in Property & Casualty (P&C) insurance, applicable to claims, premiums, and commissions data.
- Why It’s Important: It leverages historical experience to predict future outcomes, making it versatile and valuable in various contexts.
- Key Benefit: Highly effective in estimating reserves by analyzing past data patterns, making it indispensable for actuaries.
Method N°2: Bornhuetter-Ferguson
How to Provision for the Riskier, More Volatile Lines of Business
- Overview: Developed for riskier and more volatile lines like financial insurance or Directors and Officers (D&O) insurance, where the Chain-Ladder method might yield inconsistent results.
- Why It’s Important: Combines historical data with expected loss ratios to reduce volatility.
- Key Benefit: Provides stable and reliable reserve estimates, especially for recent and unpredictable periods.
Method N°3: Average Cost
Ultimate Claims as the Product of Claims Numbers and Average Costs
- Overview: Estimates ultimate claims by multiplying the ultimate claims numbers matrix by the ultimate average costs matrix, explicitly accounting for claims inflation.
- Why It’s Important: Utilizes a frequency x severity approach to identify trends in claims inflation.
- Key Benefit: Useful for tracking inflation trends in high-frequency claims with rising costs year over year.
Method N°4: De Vylder
How to Provision for Risks with Unknown Origin Periods or Sparse Data
- Overview: Developed by F.E. de Vylder for reserving when origin periods are unknown, or data is sparse and unreliable.
- Why It’s Important: Offers a solution for estimating reserves in complex scenarios with incomplete data.
- Key Benefit: Enhances accuracy in uncertain or data-poor environments, providing a critical tool for challenging datasets.
How to choose the right method at the right time?
Among the four universally known and used reserving methods in the actuarial world, our experts give you some useful guidelines for choosing the right method at the right time in this E-book.
Download the e-book and know when to use which actuarial reserving method at the right time!
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