Empirical Method-Based Aggregate Loss Distributions

By C.K. Stan Khury

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This paper presents a methodology for constructing a deterministic approximation to the distribution of the outputs produced by the loss development method (also known as the chain-ladder method). The approximation distribution produced by this methodology is designed to meet a preset error tolerance condition. More specifically, each output of the loss development method, when compared to its corresponding approximation, meets the preset error tolerance. Ways to extend this methodology to the Bornhuetter-Ferguson and the Berquist-Sherman families of methods are described. The methodology is illustrated for a sample loss development history.

Keywords: Loss variability, aggregate loss distributions, loss development method, Bornhuetter-Ferguson method, Berquist-Sherman method, loss development, approximations to aggregate loss distributions, empirical aggregate loss distributions, method-based aggregate loss distributions, flash benchmarking, longitudinal benchmarking.

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Khury, C.K. Stan, "Empirical Method-Based Aggregate Loss Distributions," Variance 6:1, 2012, pp. 78-101.

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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.