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

Which assumption underlies the basic average cost per claim method, as opposed to the basic chain ladder method?

The method assumes claim numbers and average cost per claim can be projected separately, with the average cost pattern stable across development years once inflation is allowed for, unlike the chain ladder that projects total amounts directly.

  1. AClaim amounts develop in a fixed proportion to premiums
  2. BAverage cost per claim and claim numbers can be projected separately, with the average cost pattern stable by development year after allowing for inflationCorrect
  3. CClaim numbers are independent of the accident year in every case
  4. DReported claims are always settled for the same amount
  5. Reserves are unaffected by claims inflation

Explanation

The method separates frequency from severity and assumes stable development patterns of average cost by development year, after inflation adjustment. Other options are not assumptions of the method.

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