Reserve estimation using paid and incurred claims information

Abstract

Insurance companies need to estimate accurately the possible future claims payments and thus allocate sufficient reserves to avoid financial difficulties. Reserve estimates are usually based on historical data from various sources of information. In classical reserve estimation methods, the reserve estimate is based on either paid claims information only or incurred claims information. Since all claims are eventually settled, in theory, the ultimate claim estimates obtained using paid or incurred claims data are expected to become equal. In practice, however, the ultimate estimates obtained using these two sources of information generally differ. Therefore, methods have been developed that use both sources of information to obtain the same or similar estimates. Munich Chain Ladder, Extended Complementary Loss Ratio and Paid-Incurred Chain methods are among the widely used ones. In the Turkish insurance sector, reserves are estimated using the Chain Ladder method and the Munich method. This study aims to investigate the alternative method for estimating reserves for Turkish Highways Motor Vehicles Compulsory Liability Insurance. Reserves are estimated using all these methods. Based on mean squared error, it is concluded that the Paid Incurred Chain method can be an alternative.

Keywords

• Claim Reserve
• Extended Complementary Loss Ratio Method
• Mack’s Chain Ladder Method
• Munich Chain Ladder Method
• Paid-Incurred Chain Method

References

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