Are you an insurer constantly questioning whether your current reserving methods are the best? Do you wonder when it’s time to switch methods? In this article, we’ll explore the four essential reserving methods every actuary should master: Chain Ladder, Bornhuetter-Ferguson, Average Cost, and De Vylder.
These actuarial reserving methods are fundamental in the actuarial world, each offering unique advantages for different scenarios. Whether you’re dealing with high-frequency claims or sparse data, understanding these techniques is crucial for accurate and reliable reserve estimates.
For those looking to delve deeper, our premium content provides an in-depth analysis and advanced strategies for mastering these reserving methods. Download our e-book to gain expert insights and elevate your reserving actuarial skills.
The four non-life reserving methods to master
Method N°1: Chain-Ladder
The Chain-Ladder method, 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.
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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 reserving method?
Want to know more about these actuarial reserving methods?
Download our e-book to get detailed insights and guidelines on when to use each reserving method effectively.
Your guide to actuarial reserving methods: Frequently Asked Questions
What are the four universally known reserving methods in actuarial science?
As discribed in this article, the top 4 key reserving methods are Chain Ladder, Bornhuetter-Ferguson, Average Cost, and De Vylder. Bootstrap methodoly is also largely used in claim reserving to predict future claims cash flows and their variability.
Each method has its unique applications and benefits in the actuarial field.
What is the Chain-Ladder method and why is it important?
The Chain-Ladder method is widely used in P&C insurance to predict future outcomes based on historical data. It’s highly effective in estimating reserves by analyzing past data patterns.
Learn more on how and when to use the Chain-Ladder method in our Actuarial Reserving Guide.
When should I use the Bornhuetter-Ferguson method?
As explained above, the Bornhuetter-Ferguson method is ideal for riskier and more volatile lines of business, such as financial insurance or Directors and Officers (D&O) insurance. It combines historical data with expected loss ratios to provide stable reserve estimates.
Get to know more on our dedicated e-book.
How does the Average Cost method work?
The Average Cost method estimates ultimate claims by multiplying the ultimate claims numbers by the ultimate average costs, accounting for claims inflation. It is useful for tracking inflation trends in high-frequency claims.
Learn more on the Average Cost method in our Actuarial Reserving e-book.
What is the De Vylder method and when is it used?
The De Vylder method is used for reserving when origin periods are unknown or data is sparse. It enhances accuracy in uncertain or data-poor environments, making it a critical tool for challenging datasets.
How do I choose the right reserving method?
Choosing the right method depends on the specific context and data available.
Our e-book provides guidelines to help you decide when to use each actuarial reserving method: read the complete guide and master reserving methods.
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