Quantifying Uncertainty in Reserve Estimates
By Zia Rehman, Stuart A. Klugman
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