Claim Reserving: Performance Testing and the Control Cycle

By Yi Jing, Joseph R. Lebens, Stephen P. Lowe

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Abstract

Fundamentally, estimates of claim liabilities are forecasts subject to estimation errors. The actuary responsible for making the forecast must select and apply one or more actuarial projection methods, interpret the results, and apply judgment. Performance testing of an actuarial projection method can provide empirical evidence as to the inherent level of estimation error associated with its forecasts. Performance testing of alternative methods provides formal assurance that the actuary is using the best methods for the given circumstance, and also provides insight into the appropriate weight to give to the indications produced by each method. Performance testing is an integral part of the actuarial control cycle associated with the loss reserving process. It provides the necessary feedback loop to the actuary, assuring that he or she is not overconfident about his or her forecasts. This paper describes how to construct sound performance tests, consistent with statistical crossvalidation, within the reserving control cycle. It illustrates the application of the techniques via a case study, including some interesting empirical results.

KEYWORDS: Chain-ladder, claim reserving, control cycle, cross-validation, estimation error, forecast error, loss reserves, overconfidence, parameter risk, process risk, predictive skill, reserve accuracy, reserving process

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Citation

Jing, Yi, Joseph R. Lebens, and Stephen P. Lowe, "Claim Reserving: Performance Testing and the Control Cycle," Variance 3:2, 2009, pp. 161-193.

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Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.