Hi, I'm looking at part a). How are we sure that tail factor is needed here? In the report it says Incurred development factor for 3-4 greater than 1 so a tail-factor might be expected But it could be development factor 4-ult is 1, hence no tail factor needed right? Also, looking at the data given, the ultimate claims match the year 4 reported claims development (for 2007 underwriting year). Kindly advise. Thanks
If you look at the oldest u/w year (2007) it looks like it is still developing (4,987 at Dev Year 3 and 5,001 at Dev Year 4), hence you probably need to add a tail factor here. I think you may have slightly misunderstood the information provided to you in the question. They have given you a suggested development pattern and the corresponding ultimates that would be derived from that pattern. Their assumed pattern has no tail factor, hence the factor from 4-ult is 1.000 and you get an ultimate for 2007 of 5,001 = claims to date. One of things they were looking for on this part of the question was for you to point out that it looks like you need a tail factor in which case their selected pattern and the resulting estimated ultimates were not reasonable.
Thanks. How do I know that it will continue to develop after year 4 and not reached the ultimate of 5001 at year 4 then?
You don't know for certain. But an educated guess looking at the last two known data points (4,987 and 5,001) which are not the same suggests it is most likely to continue developing after year 4. In the real world you would bring in factors such as your knowledge of the class of business/similar classes and any other features of the claims environment or contract wordings (eg no claims can be made after 4 years) when reaching this sort of conclusion.
