Difference between revisions of "Friedland16.ALAE"
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Revision as of 19:42, 2 January 2020
Chapter 16: Estimating ALAE (Allocated Claim Adjustment Expenses)
Reading: Friedland, J.F., Estimating Unpaid Claims Using Basic Techniques, Casualty Actuarial Society, Third Version, July 2010. The Appendices are excluded.
Study Tips
BattleTable
Based on past exams, the main things you need to know (in rough order of importance) are:
- multiplicative method - a ratio method for calculating ultimate ALAE
- additive method - a ratio method for calculating ultimate ALAE
- advantage/disadvantage - of ALAE ratio methods
- ALAE ratio methods - additive versus multiplicative method
reference part (a) part (b) part (c) part (d) E (2019.Spring #24) multiplicative method:
- ultimateALAE ratio methods:
- additive vs multiplicativeadvantage/disadvantage:
- of ALAE ratio methodsE (2018.Spring #25) paid ALAE development:
- ultimateadditive method:
- ultimatejustify final selection:
- ultimateE (2017.Spring #25) paid ALAE development:
- ultimate (with large loss)multiplicative method:
- ultimate (with large loss)E (2016.Spring #23) additive or multiplicative:
- ultimateadvantage/disadvantage:
- of ALAE ratio methodsE (2015.Fall #24) multiplicative method:
- ultimateadditive method:
- ultimatejustify final selection:
- ultimateE (2014.Spring #21) paid ALAE development:
- challengesALAE ratio methods:
- challengesfrequency-severity:
- for legal expenses
In Plain English!
Question: identify 2 common method used to estimate ultimate ALAE
- development of paid ALAE triangle to ultimate in the standard way
- ratio methods: uses triangle of (paid ALAE $) / (paid claim $s)
- nbsp; - may be developed multiplicatively (as in the standard development method)
- nbsp; - may be developed additively (link ratios are calculated as a difference instead of a quotient)
Question: describe advantages & disadvantages of using ratio methods to estimate ultimate ALAE
- advantages of ratio methods:
- ratios recognize the relationship between loss & ALAE
- ratios provide diagnostics (individual AYs can be excluded if unreasonable)
- ratios are more stable than developing ALAE directly (ALAE can be small & highly leveraged, especially at early maturities)
- advantages of ratio methods:
- disadvantages of ratio methods:
- inaccurate ultimate loss estimates may cause inaccurate ALAE estimates
- timing of ALAE payments may differ from timing of loss payments (causes distortions in ratio triangle)
- trend for ALAE payments may differ from trend for loss payments
- disadvantages of ratio methods:
