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Slower development pattern leading to lower ultimate claims estimate?

C

Chris Beech

Member
Hi all, I’m getting confused with one of the comments in chapter 17, on page 22:

‘Recent studies have also suggested the existence of a ‘reserving cycle’ which is highly correlated with the underwriting cycle.

This appears to show that in a soft market, incurred claims development patterns are slower to develop (or longer-tailed) than in a hard market so that an unadjusted projection can underestimate ultimate claims in a soft market (and, equivalently, overestimate them in a hard market, when insurers can afford it).’

The above states that a longer tailed development pattern leads to an underestimate of ultimate claims – but I thought that longer development patterns would project higher ultimate’s for a given incurred to date? E.g. if an origin year is 60% developed after a few year and had 500 incurred, the ultimate would be 500/0.6 = 833. Whereas if the development pattern were slower/longer tailed, e.g. 40% developed, the projected ultimate would be 500/0.4 = 1250?

So I’m not sure I understand the above comment that the slower development patterns in a soft market leads to an underestimate of ultimate claims? Am I missing something?

Thanks!
 
Hi,

I am not sure of your interpretation.

This sentence, to me, is saying that if a triangle isn't adjusted to allow for the fact that softer market leads to longer tails, then these un-adjusted triangles will project an ultimate that is lower than what it ought to be.

Does that help at all?

Aman
ActEd Tutor
 
Aman Sehra said:
Hi,

I am not sure of your interpretation.

This sentence, to me, is saying that if a triangle isn't adjusted to allow for the fact that softer market leads to longer tails, then these un-adjusted triangles will project an ultimate that is lower than what it ought to be.

Does that help at all?

Aman
ActEd Tutor
Click to expand...

Hi Aman, thanks for the reply

This makes sense now after re-reading it – I thought it was saying that longer tailed development factors would lead to under reserving, but its not adjusting for the longer tailed factors that leads to under reserving.

Thanks!
 
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