Quantifying Uncertainty in Reserve Estimates

By Zia Rehman, Stuart A. Klugman

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Abstract

Property/casualty reserves are estimates of losses and loss development and as such will not match the ultimate results. Sources of error include model error (the methodology used does not accurately reflect the development process), parameter error (incorrect model parameters), and process error (future development is random). This paper provides a comprehensive and practical methodology for quantifying risk that includes all three sources. The key feature is that variability is captured by examining historical changes in ultimate values rather than examining the underlying claim distribution. We present the conceptual framework as well as practical examples.

KEYWORDS: Reserve uncertainty/variability, reserve allocation, multiple lines

Citation

Rehman, Zia, and Stuart A. Klugman, "Quantifying Uncertainty in Reserve Estimates," Variance 4:1, 2010, pp. 30-46.

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Mission Statement

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.