CAS Exam 7 Spring 2012, Question 5

Study guide: Exam 7

A loss reserve actuary has reviewed three cumulative paid loss triangles to test whether the assumptions underlying the chain ladder method are met.

Part a (0.75 points)

State the three chain ladder assumptions as described by Mack.

For each of the following situations, discuss whether any of Mack's assumptions are violated.

i. The first triangle shows a faster claims settlement pattern in the most recent calendar year resulting from the use of new claims management software.
ii. For the second triangle, the actuary found that the most appropriate selection method for loss development factors was to use an all year volume-weighted average approach.
iii. In the third triangle, the 36-48 month loss development factors are inversely proportional to the 24-36 month loss development factors. These relationships do not appear to be random.