Loss Reserve Homework Solutions
Loss Reserve Homework Solutions
The Freebourn Stop Loss Insurance Company uses the Expected Loss Ratio Method to set
reserves for its stop loss business. During 2020, Freebourn had earned premium of 1,400,000
and paid claims of 250,000. Freebourn expects a loss ratio of 55%.
Determine the reserve that Freebourn should hold at December 31, 2020.
Solution:
All premiums are paid on the first day of the month and all premiums are annual premiums.
Calculate the earned premium by Miller during the first quarter of 2020.
Solution:
Since the premium for January was collected on January 1 and was for a whole year (12 months),
we have earned 3 months of the premium as 3 months have passed so for January 1.
3
Earned Premium (120, 000) 30, 000.
12
Since the premium for February was collected on February 1 and was for a whole year (12 months),
we have earned 2 months of the premium as 2 months have passed so for February
2
Earned Premium (150, 000) 25, 000.
12
Since the premium for March was collected on March 1 and was for a whole year (12 months),
we have earned 1 month of the premium as 1 month has passed so for March
1
Earned Premium (180, 000) 15, 000.
12
Total Earned Premium = 30, 000 25000 15, 000 70, 000
3. You are given the following Paid Claims triangle:
a. Calculate the loss reserve on December 31, 2019 using the chain ladder method with
arithmetic average loss development factors.
b. Calculate the loss reserve on December 31, 2019 using the chain ladder method with
volume weighted average loss development factors.
Solutions to a. and b.
There is a spreadsheet on the website with all the formulas if you cannot follow these
tables.
c. What is the total amount of claims paid in 2019?
Solution:
d. If the earned premium for 2016 was 50,000, calculate the loss ratio for 2016.
Solution:
Expected total loss paid 15, 000 10, 000 4, 000 2, 000
Loss Ratio =
Earned Premium 50, 000
31, 000
0.62
50, 000
4. The following table shows the link ratios for cumulative payments based on the chain ladder
method:
The following table shows the total amount of claims paid through the end of December 2019:
Calculate the reserve using the chain ladder method for December 31, 2019.
Solution:
Loss Reserve = Estimated Total Loss – Claims Already Paid = 39,952.50 – 28,000 = 11,952.50
5. The following table shows the link ratios for cumulative payments based on the chain ladder
method:
For accident year 2018, the earned premium was 100,000. The expected loss ratio was 0.70.
The claims paid during 2018 and 2019 totaled 50,000.
For the claims from accident year 2018, determine the reserves using:
Solution:
Solution:
Solution:
1
Reserve = (Expected Total Losses Under the Loss Ratio Method) 1
fUlt
fUlt (1.25)(1.10)(1.05) 1.44375
(Expected Total Losses Under the Loss Ratio Method) 70, 000 from Part a.
1
Reserve = (70, 000) 1 21,515.15
1.44375
6. You are given the following information:
Calculate the actuarial reserve using the Bornhuetter-Ferguson method and volume weighted
average loss development factors.
Solution:
f ( / 4) 1 fUltAY 5 1
16, 200
f (4 / 3) 1.14894 fUltAY 6 (1.14894)(1) 1.14894
14,100
14,100 14,900
f (3 / 2) 1.45 fUltAY 7 (1.45)(1.14894)(1) 1.66596
9, 700 10,300
9, 700 10,300 10,800
f (2 /1) 2 fUlAYt 8 (2)(1.45)(1.14894)(1) 3.33123
4850 5150 5400
Expected Claims Based On Loss Ratio Method = (Earned Premium)(Expected Loss Ratio)
1 1
Res - AY5 = (Expected Claims) 1 AY 5
(17,100) 1 0
fUlt 1
1 1
Res - AY6 = (Expected Claims) 1 AY 6
(17, 000) 1 2203.75
fUlt 1.14894
1 1
Res - AY7 = (Expected Claims) 1 AY 7
(19,110) 1 7639.14
fUlt 1.66596
1 1
Res - AY8 = (Expected Claims) 1 AY 8
(19,360) 1 13,548.33
fUlt 3.33123
v. fUlt 1.15
Solution:
750, 000 450, 000 300, 000 is the Total Actuarial Reserves which are split as
Case reserves of 250,000 and IBNR reserves of 50,000
Solution:
805, 000 450, 000 355, 000 is the Total Actuarial Reserves which are split as
Case reserves of 250,000 and IBNR reserves of 105,000
c. The Bornhuetter-Ferguson Method
Solution:
Expected Total Losses Under Loss Ratio Method = (Earned Premium)(Expected Loss Ratio)
1 1
IBNR Reserve = (Expected Total Losses) 1 = (750, 000) 1 97,826
fUlt 1.15
Using an annual effective interest rate of 6% and assuming future loss payments are made in the
middle of the year, calculate the discounted reserve using the values in Table 3.5.
Solution:
See spreadsheet for detailed formulas if you do not match these numbers.