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Actuarial Estimation Of Technical Reserves In Insurance Companies. Basic Chain Ladder Method

Author

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  • Corneliu Cristian Bente

    (Universiatea din Oradea)

Abstract

A major concern for insurance companies is to keep achieving financial stability of the insurance business which it carries. They must work in order to fully cover the expense of premiums collected, assumed obligations to policyholders. Otherwise, get in position to not fulfil these obligations due to insufficient insurance reserves established. Unfavourable balance emerged between the compensation, due first, to be covered from other resources. If this state of balance is maintained and becomes an alarming extent, the insurer may get unable to pay. To avoid such a situation there is required the insurer to accurately determine the level of insurance premiums to collect from insurers, and technical reserves required to fulfil. But is this is the case in reality? To estimate the total reserves to be made for the entire portfolio of damage unsettled can be used several methods including The Chain Ladder Method. This paper, is about the results of applying The Chain Ladder Method in insurance companies and also about the limits of it. The validation process applies to both the quantitative and the qualitative is not limited to the comparison between estimates and results. It should include qualitative aspects such as evaluation mechanisms control, documentation, interpretation and communication of results. This method is used by insurers to predict the amount of reserves to be established to cover future damage. This actuarial method is one of the most used for grounding reserves. The method is based on the assumption that existing patterns of claims in the past will continue in the future. As this assumption to be valid the data should be accurate in the past. But several factors can affect the accuracy of data, including changes in insurance products offered, changes in legislation, many times with claims for compensation, or changes in the approval process of compensation for damages. Insurance companies must maintain a share premium of the insurance premiums to pay claims that may arise in the future.

Suggested Citation

  • Corneliu Cristian Bente, 2017. "Actuarial Estimation Of Technical Reserves In Insurance Companies. Basic Chain Ladder Method," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 227-234, July.
    • Handle: RePEc:ora:journl:v:1:y:2017:i:1:p:227-234
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    References listed on IDEAS

    as
    1. Ioannis Ntzoufras & Petros Dellaportas, 2002. "Bayesian Modelling of Outstanding Liabilities Incorporating Claim Count Uncertainty," North American Actuarial Journal, Taylor & Francis Journals, vol. 6(1), pages 113-125.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    claims; chain-ladder method; damages; premium rates.;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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