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

Which assumption is fundamental to the basic chain ladder method?

The basic chain ladder assumes that the pattern of claims development is the same for every accident year, so future development is proportional to the cumulative claims already emerged. It does not rely on premiums or a fixed incremental pattern.

  1. AIncremental claims in each development year are independent of earlier development years and equal across accident years
  2. BClaims inflation is zero and the number of claims is constant across accident years
  3. CDevelopment patterns of cumulative claims are similar across accident years, with future development proportional to the amount already emergedCorrect
  4. DUltimate claims for each accident year are a fixed multiple of premium
  5. Claims development is random with no pattern by development year

Explanation

Chain ladder assumes each accident year follows the same proportional development pattern, so future claims are the cumulative-to-date amount times development factors. It does not need a premium base (that is Bornhuetter-Ferguson or loss ratio). It does not need constant claim counts, only a stable pattern.

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