Actuarial Notes

CAS Exam 5 Fall 2016, Question 18

Study guide: Exam 5

An actuary is estimating unpaid claims for a company using the data below as of December 31, 2015.

Accident Year On-Level Earned Premium ($000) Paid Claims ($000) Unpaid Claims Estimate — Paid Bornhuetter-Ferguson Technique ($000) Unpaid Claims Estimate — Paid Development Technique ($000)
2012 2,000 1,450 0 0
2013 2,000 1,000 102 100
2014 2,000 700 373 350
2015 2,000 400 622 500
  • The actuary uses the same expected claims ratio for all years.

Part a (0.75 points)

Calculate the expected claims ratio used in the Bornhuetter-Ferguson technique.

Part b (0.5 points)

Select an unpaid claims estimate for accident year 2015 from the two techniques given above and justify the selection.

Part c (1.5 points)

After constructing these estimates, the actuary learns of a change in the claims department in 2014 that has led to slower claims payments. Discuss whether the unpaid claims estimate from each technique below would be overstated or understated when calculated without making any adjustments to recognize the slower claims payments:

i. Expected claims technique

ii. Paid Bornhuetter-Ferguson technique

iii. Paid development technique

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Concepts tested

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