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IAI Actuarial Core Principles · Economic Modelling · Run-off triangles

A chain ladder projection is performed on a cumulative claims triangle in which the latest accident year has unusually large early claims due to a one-off catastrophe. What is the most likely effect on the projected ultimate for that year?

The ultimate will be overstated, because the chain ladder scales the unusually large early claims by development factors derived from typical patterns, even though the catastrophe will not develop further in that way.

  1. AIt will be understated, because the development factors are too high
  2. BIt will be overstated, because the large early amount is scaled up by development factors as if it were typicalCorrect
  3. CIt will be unaffected, because the factors are volume weighted
  4. DIt will equal the paid amount to date
  5. It will be correct, because chain ladder is self-correcting

Explanation

Chain ladder multiplies the latest cumulative amount by factors reflecting typical development. A one-off large early amount that will not develop further gets grossed up, overstating the ultimate. Adjusting or removing the event is usually required.

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