Obtaining Predictive Distributions for Reserves Which Incorporate Expert Opinion

By Richard Verrall

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This paper shows how expert opinion can be inserted into a stochastic framework for loss reserving. The reserving methods used are the chain-ladder and Bornhuetter-Ferguson, and the stochastic framework follows England and Verrall [8]. Although stochastic models have been studied, there are two main obstacles to their more frequent use in practice: ease of implementation and adaptability to user needs. This paper attempts to address these obstacles by utilizing Bayesian methods, and describing in some detail the implementation, using freely available software and programs supplied in the Appendix.

KEYWORDS: Bayesian statistics, Bornhuetter-Ferguson, chain-ladder, claims reserving, expert opinion, risk

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Verrall, Richard, "Obtaining Predictive Distributions for Reserves Which Incorporate Expert Opinion," Variance 1:1, 2007, pp. 53-80.

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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.