Question

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

Answer 1

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.