CAS Exam 5 Spring 2014, Question 21
Study guide: Exam 5
An actuary is tasked with estimating legal expense reserves as of December 31, 2013 for an insurance company's general liability line of business.
The following information is available:
- The company recently began dedicating more legal resources to defend claims at earlier stages in the claim cycle in an attempt to reduce ultimate claim costs.
- Prior to this claims initiative, the company had a relatively stable claim history.
- Paid legal expenses are tracked separately and are considered allocated claim adjustment expenses for the company.
Part a (0.5 points)
Describe a potential challenge of using the paid development technique to estimate unpaid allocated claim adjustment expenses for this company.
Part b (0.5 points)
Describe a potential challenge of using a paid ALAE-to-paid claims only ratio technique to estimate unpaid allocated claim adjustment expenses for this company.
Part c (0.5 points)
Comment on whether using a frequency-severity technique is appropriate to estimate legal expense reserves for this company.
Answer this question and see the worked solution
Concepts tested
- Allocated Loss Adjustment Expense
- Development Factor
- Frequency
- Severity
- Claims Processing Changes
- Frequency-Severity Method