The starting point for assessing the available capital of an insurance company is to value its...

The starting point for assessing the available capital of an insurance company is to value its assets and liabilities. The liabilities of insurance under- takings include the technical provisions which constitute a signicant proportion of their balance sheets. List two assumptions for each of the following claim reserving methods: (a) the basic chain ladder method (b) the in ation adjusted chain ladder method (c) the average cost per claim method (d) the Bornhuetter-Ferguson method

Expert Solution

Assumptions for basic chain ladder method-

First accident year is fully run off.
Inflation is not allowed for explicitly, rather it is allowed for implicitly as a weighted average of past inflation.

Assumptions for the inflation adjusted chain ladder method-

Claims in each development year are a constant proportion in real terms of total claims for each accident year.
Inflation is allowed for explicitly and also we assume that both the past and future assumptions for inflation are correct.

Assumptions for the average cost per claim method-

The average cost per claim in each development year is a constant proportion in monetary terms of the ultimate average cost per claim for each accident year.
The number of claims in each development year is a constant proportion in monetary terms of the ultimate number of claims for each accident year.

Assumptions for the Bornhuetter-Ferguson method-

The loss ratio is correct.
Claims im iach development year are a constant proportion in monetary terms of total claims for each accident year.
Inflation is not allowed for explicitly, rather it is allowed for implicitly as a weighted average of past inflation.

orchestra answered 1 year ago

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