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

Which practical check is most appropriate before relying on a chain-ladder projection of a claims triangle?

Examine the development factors by accident year for trends or outliers, and consider changes in claims handling or business mix. The chain-ladder method assumes a stable development pattern, so such checks test whether past factors suit future projection.

  1. AConfirm that the latest diagonal is always the largest figure in each column
  2. BConfirm that all accident years have exactly the same exposure
  3. CExamine development factors by accident year for trends or outliers, and consider changes in claims handling or business mixCorrect
  4. DConfirm that incremental claims are normally distributed
  5. Confirm that the tail factor equals zero

Explanation

Chain-ladder relies on stable development patterns, so factors by accident year should be inspected for trends or outliers, and changes in claims settlement, reserving or business mix considered. Equal exposure and normality are not required, and the tail factor is normally at least 1.

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