Claims management, reserving and capital modelling
This domain covers the claim from notification to settlement, the reserving methods that turn claim experience into a liability, and the capital models that put a distribution around it.
Claims and reserves
- Reserve components: notified case estimates, IBNR, IBNER and unallocated loss adjustment expenses. Review the handling process - reserving philosophy, average cost per claim, salvage and subrogation, fraud referrals.
- Develop paid and incurred triangles; choose link ratios and tail; prefer Bornhuetter-Ferguson where recent years are immature; use Mack or a bootstrap for volatility.
- Claims inflation is not CPI: legal costs, Ogden discount rate, labour and parts, and social inflation all move severity. Index the triangle before projecting when inflation is unstable.
Capital
- Best estimate plus risk margin under Solvency UK; SCR at the 99.5% one-year VaR, from the standard formula or an internal model with validation and use tests.
- Aggregation needs a stated dependency assumption (copulas, correlations, scenarios) and must allow for reinsurance recoveries and counterparty default.
Worked example
Cumulative paid claims of 1,000 / 1,400 / 1,500 at 12/24/36 months give link ratios of 1.40 and 1.0714. The latest diagonal at 12 months is 1,200, so projected ultimate = 1,200 x 1.40 x 1.0714, about 1,800, implying IBNR of roughly 600 before tail and inflation. State the assumptions: stable case reserving and unchanged settlement speed.
Traps
Treating the chain ladder as assumption-free; omitting a tail; mixing accident and underwriting year bases; quoting capital without the risk measure and horizon.