A model study about the applicability of the Chain Ladder method

Magda Schiegl

Scandinavian Actuarial Journal, 2015, vol. 2015, issue 6, 482-499

Abstract: Loss Reserving is a major topic of actuarial sciences with a long tradition and well-established methods – both in science and in practice. With the implementation of Solvency II, stochastic methods and modelling the stochastic behaviour of individual claim portfolios will receive additional attention. The author has recently proposed a three-dimensional (3D) stochastic model of claim development. It models a reasonable claim process from first principle by integrating realistic processes of claim occurrence, claim reporting and claim settlement. This paper investigates the ability of the Chain Ladder (CL) method to adequately forecast outstanding claims within the framework of the 3D model. This allows one to find conditions under which the CL method is adequate for outstanding claim prediction, and others in which it fails. Monte Carlo (MC) simulations are performed, lending support to the theoretic results. The analysis leads to additional suggestions concerning the use of the CL method.

Date: 2015
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DOI: 10.1080/03461238.2013.852992

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