Question

Q2. Suppose you are working in an insurance company. You are required to estimate loss reserves. How you will estimate the loss reserves. What will be examples of methods that can be used for this purpose? What is the basis for each method?

Answer 1

Loss reserving or outstanding reserves refers to the calculation of the required reserves for a transiv general insurance business, typically the claims reserves represents the money which should be held by the insurer so as to be able to meet all future claims arising from policies currently enforced and policies written in the past.

Methods in general insurance are different from those used in life insurance,pensions and health insurance since general insurance contracts typically have a much shorter duration, most general insurance contracts are written for period of 1 year and typically there is only one payment of premium at the start of the contract and exchange and exchange for covereage over the year.

Reserves are calculated differently for different contracts from contracts of longer duration with multiple premium payment, since there are ni future premiums to consider in this case the reserves are calculated by Forecasting future losses from past losses.

The popular methods of claims reserving includes the chain ladder method and bornhuetter ferguson method.

1)Chain ladder method is also known as the development method as soon as past experience as an indicator of future experience loss development patterns in past are used to estimate how claim in absolute increase or decrease in the future.

2)The Bornhuetter ferguson method uses both past loss development as an independently derived prior estimate as an ultimate expected losses.

If i am working in an insurance company i would follow the same two methods as they were the famous methods, my estimation will be according to the above two methods.