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Calendar Year Effects, Claims Inflation and the Chain-Ladder Technique

Published online by Cambridge University Press:  10 May 2011

D. Brydon  and
R. J. Verrall
R. J. Verrall
Affiliation:
Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ. : Email: r.j.verrall@city.ac.uk
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Abstract

This paper examines the chain-ladder technique using the recently developed theory for age-period-cohort models. The theory was set out by Kuang et al. (2008a), and we believe that it has some significant implications for claims reserving and the chain-ladder technique. This paper applies the age-period-cohort model using the over-dispersed Poisson framework, and examines a number of experiments in order to understand better how the chain-ladder technique deals with calendar year effects. The conclusions from these investigations are that the basic chain-ladder technique may have some fundamental difficulties in many circumstances. We would therefore recommend that it should be used with caution, and that the data are examined in detail before any projections are made. This has particular importance in the context of solvency calculations since the chain-ladder technique can impose some specific patterns into the projections.

Keywords

Chain-Ladder TechniqueClaims ReservingSolvency
Type
Papers
Information
Annals of Actuarial Science , Volume 4 , Issue 2 , September 2009 , pp. 287 - 301
Copyright
Copyright © Institute and Faculty of Actuaries 2009

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