Friedland12.CaseOS

Reading: Friedland, J.F., Estimating Unpaid Claims Using Basic Techniques, Casualty Actuarial Society, Third Version, July 2010. The Appendices are excluded.

Chapter 12: Case Outstanding Development Method

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• fact A...
• fact B...

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Fall #18)	unpaid: - case O/S method	scenario where it works: - case O/S method
E (2017.Fall #22)	unpaid: - case O/S method	identify limitations: - in method for part (a)
E (2017.Spring #19)	expctd incremental clms: - rptd devlpt method	expctd incremental clms: - paid to prior case O/S	RY versus AY: - case O/S method
E (2016.Fall #19)	unpaid: - case O/S method	industry benchmarks: - reasonable?	unpaid estimate: - reasonable?
E (2016.Spring #17)	unpaid: - case O/S method	Case O/S method: -appropriate for part (a)?
E (2014.Spring #23)	cumulative % rptd: - calculate	unpaid: - case O/S method
E (2013.Spring #17)	unpaid: - case O/S method	identify limitations: - case O/S method	scenario where it works: - case O/S method

In Plain English!

There are 2 case O/S (case outstanding) methods and we discuss the hard method first. That normally wouldn't be logical but the 2 methods are not really related, other than that they both used case O/S data in some way. So from the point of view of learning, there's no advantage in covering the easy method first. Method #1 appears also appears more frequently on the exam.

Case O/S Method #1 (Hard Method)

This case O/S method reminds me of the frequency-severity disposal rate method. Lots of triangles, lots of judgmental selections, except the case O/S method doesn't appear on the exam nearly as often as frequency-severity methods. Anyway, this case O/S method generally starts with 2 triangles:

• paid loss (either cumulative or incremental)
• case O/S loss

It doesn't matter whether the given paid losses are cumulative or incremental because you can calculate one from the other. Recall:

• case O/S loss   =   (reported loss) – (paid loss)

So this method uses both paid & reported data. That might not be a good thing. Alice has a pop quiz and morality tale for you.

Pop Quiz A!    :-o

• What answer do you get if you apply the iterative Benktander approach an infinite number of times? Click for Answer 

Here's an exam problem based on this idea along with Alice's solution and a couple of practice problems.

E (2019.Spring #15)

Solution: 2019.Fall #20

Practice: 2 problems like 2019.Spring #15

Note: Sample answer 1 in the examiner's report has an error in the next-to-last step where they calculate paid-on-case for different ages. The values for 12, 36, and 48 months are incorrect and the value for 60 months is missing. See Alice's solution for the correct values.

Case O/S Method Concepts

Pop quiz:

(a) Will methods that use unadjusted paid data be accurate when there has been a change in the settlement rate of claims?

(b) Will methods that use unadjusted reported data be accurate when there has been a change in case reserve adequacy?

(c) Based on you answers to (a) and (b) will case O/S method #1 be accurate in either of those 2 situations?

The moral is that more complicated methods have more ways to fail. It's true that more sophisticated methods allow the actuary to make explicit assumptions for things like inflation, frequency & severity trends, court adjustments, and probably many others, but each assumption magnifies the parameter risk. That's why the good old development method, with a dash of common sense, is so common.

Reserving methods that simply pile on the parameters are subject to the law of diminishing returns. Refer somewhere to my own research using SimPolicy.

answers:

(a) no

(b) no

(c) no