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

Which feature of claims data most directly makes the basic chain ladder method unreliable when applied to a run-off triangle?

A change in claims settlement speed undermines chain ladder because the method assumes past development patterns will repeat for later accident years. If recent years settle faster or slower, the historical factors misstate future development and produce biased reserves. Units or cumulative presentation do not affect this assumption.

  1. AClaim amounts being recorded in rupees rather than lakhs
  2. BA sudden change in claims settlement speed during the period, so past development patterns no longer hold for recent yearsCorrect
  3. CHaving more accident years than development years
  4. DUsing cumulative rather than incremental data
  5. Triangles that include a year with a positive development factor

Explanation

Chain ladder assumes the development pattern observed in past years continues for later years and is stable across accident years. A change in settlement speed breaks this assumption. Units, cumulative presentation and positive factors are irrelevant to validity.

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