The methodology on how to calculate IBNR doesn’t only rely on the Method selected but how the selections of methods take place. You need to understand a few concepts before dwelling into reserving Methods like Chain Ladder, BF Method, and others.
In this Section, we will explain you the process of calculation of IBNR Reserves in General Insurance rather than numerical calculation. That will follow up soon after we understand the process completely.
Applying just the methods wouldn’t give you the IBNR or the outstanding reserves. It is important to understand the complete process.
Below are the steps which are generally been followed for calculation of IBNR reserves. These are explained in simplest terms and keeping in mind your level, the complications have been removed which may include providing a tail factor, age to age factors, weighted average development, interpolating LDFs and many other real life issues.
But still, these exercises will give you the knowledge for the questions asked in an interview up until 0 to 5 years. Yes! you got it right.
The processes are the same every time, methods are tweaked according to situation. Therefore, it becomes important to understand the process.
By an experienced Reserving/ Reinsurance Reserving GI professional
Many methods assume that the future pattern will follow past patterns. So, we will try to find the factor responsible for past incrementation. However, many times there are cases when we particularly do not consider a development year or an accident year due to adversities or change in processes. Simply, wherever the patter is hindered we do not consider that part.
Learning Methodology for IBNR Calculation
Time needed: 15 minutes.
Applying any method like CLM, BF, or Frequency Severity requires you to go through certain steps and all the steps have their importance. Most of these terms must easily be understood by you as you have already read them in earlier chapters.
- Create Run off triangles
You have already studied that Run off triangles is a method used to model claims experience. They’re specifically used to estimate the future claims that will be reported based on those already reported. When a claim event occurs there will be some time before it is reported or notified to the insurer – this is known as a claim delay.
RUN OFF TRIANGLES IN GI - Calculate Development Factors
It is important to understand how development factors work.
DEVELOPMENT FACTORS - Select Development Factors
It is also possible that altogether different patterns are selected where they are not applicable. Like a new organization would go for benchmarked factors or may not use any development method at all or a new location for a multinational Insurance company, so they can use development factors of another region with a little tweak or delayed.
This may be new for you and is coming in the next chapters of this section. - Calculate Cumulative Development Factor
Cumulative claim development factors (a.k.a. age-to-ultimate factors and claim development factors to ultimate) are calculated by successive multiplications beginning with the tail factor and the oldest age-to-age factor and projects the total growth over the remaining valuations.
This may be new for you and is coming in the next chapters of this section along with exercises - Calculate Ultimate Claims
This is where the methods like the Chain Ladder and others are used. The exercises for all the methods would help you to understand the basic and intermediary concepts which are very useful for anyone who is working or planning to work in the Actuarial GI sector.
This may be new for you and is coming in the next chapters of this section - Calculate IBNR
And finally calculating IBNR using different methods.
Questions Related to Processes in IBNR Calculation
Yes. The process is every time the same. We ask for LDFs and ELRs. We apply a method to get Ultimates. We reduce the Incurred and we get our reserves.