Effect of deductible on the claims development pattern.

Hi all,

Towards the end of page 21 within Chapter 17 - Assessment of reserving results of the CMP, the notes say the impact of a lower deductible would be to shorten the claims development pattern.

I understand how a lower deductible would lead to higher paid / incurred claims for a given cohort - but how does this translate to the pattern speeding up (rather than amount)? My understanding is a shorter development pattern should produce lower projections of the ultimate claim(s) - but a lower deductible should increase ultimates compared to a higher deductible?

Please could someone explain what I am missing here, many thanks!

 

My suggestion: Claims which were previously below the deductible amount - and therefore effectively nil claims in the original triangle - would now appear in the new triangle (once the deductible is lowered). Small claims tend to develop faster than larger ones, so the impact of the previously-“nil” claims entering the triangle is probably more pronounced in the earlier development periods, making the new pattern seem shorter/ faster developing. The latest diagonal of incurred amounts will be larger with the lower deductible (as you said), so even with the faster pattern, the ultimates will be higher.

e.g. if for a particular cohort, previously the latest incurred was £5000 at 70% developed, and if then with a lower deductible (and faster pattern) these became £6000 and 80% developed for that same cohort, the new ultimate of 6000/0.8 (= £7500) is still higher than the old utimate of £5000/0.7 (= £7143) despite the reduction in the FTU (factor to ultimate). I've just made up the numbers here to show the principle of what I have in mind but you could draw out a triangle of dummy data in excel and project patterns before and after changing a deductible to convince yourself.