Reserving Methods

Chain ladder, Bornhuetter-Ferguson, and stochastic reserving techniques.

Key Concepts

• •Loss development triangles: paid and incurred loss data organization
• •Chain ladder method: age-to-age factors and cumulative development factors
• •Bornhuetter-Ferguson method: combining expected loss ratios with development patterns
• •Cape Cod method: a blend of chain ladder and BF approaches
• •Average cost per claim methods: separating frequency and severity
• •Case reserves vs. IBNR reserves: components of total reserve
• •Stochastic reserving: bootstrap and Mack model for reserve uncertainty
• •Berquist-Sherman adjustments: correcting for changes in case reserve adequacy
• •Tail factors: estimating development beyond the observed triangle
• •Diagnostics: residual analysis and model validation for reserve estimates

Study Tips

• 1.Practice building development triangles from raw data before applying methods.
• 2.Understand when chain ladder vs. BF is more appropriate.
• 3.Work through problems that require selecting appropriate tail factors.
• 4.Learn to interpret diagnostics that signal problems with reserve estimates.
• 5.Practice explaining reserve estimates in plain language, as this is key for LTAM written answers.

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