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http://dx.doi.org/10.5351/CSAM.2017.24.3.211

Consideration of a structural-change point in the chain-ladder method  

Kwon, Hyuk Sung (Department of Statistics and Actuarial Science, Soongsil University)
Vu, Uy Quoc (Department of Statistics and Actuarial Science, Soongsil University)
Publication Information
Communications for Statistical Applications and Methods / v.24, no.3, 2017 , pp. 211-226 More about this Journal
Abstract
The chain-ladder method, for which run-off data is employed is popularly used in the rate-adjustment and loss-reserving practices of non-life-insurance and health-insurance companies. The method is applicable when the underlying assumption of a consistent development pattern is in regards to a cumulative loss payment after the occurrence of an insurance event. In this study, a modified chain-ladder algorithm is proposed for when the assumption is considered to be only partially appropriate for the given run-off data. The concept of a structural-change point in the run-off data and its reflection in the estimation of unpaid loss amounts are discussed with numerical illustrations. Experience data from private health insurance coverage in Korea were analyzed based on the suggested method. The performance in estimation of loss reserve was also compared with traditional approaches. We present evidence in this paper that shows that a reflection of a structural-change point in the chain-ladder method can improve the risk management of the relevant insurance products. The suggested method is expected to be utilized easily in actuarial practice as the algorithm is straightforward.
Keywords
structural-change point; chain-ladder method; loss reserve; loss development factor; run-off data; rate adjustment;
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