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Loss Reserve Homework Solutions

The document provides information to calculate reserves for several insurance companies using different methods. For Freebourn, the reserve at year-end 2020 is $520,000 using the expected loss ratio method. For Miller, the earned premium for Q1 2020 is $70,000. The document also provides details on calculating reserves using paid loss triangles, link ratios, and the chain ladder, loss ratio, and Bornhuetter-Ferguson methods.

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0% found this document useful (0 votes)
78 views12 pages

Loss Reserve Homework Solutions

The document provides information to calculate reserves for several insurance companies using different methods. For Freebourn, the reserve at year-end 2020 is $520,000 using the expected loss ratio method. For Miller, the earned premium for Q1 2020 is $70,000. The document also provides details on calculating reserves using paid loss triangles, link ratios, and the chain ladder, loss ratio, and Bornhuetter-Ferguson methods.

Uploaded by

Bev
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 12

1.

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:

Expected claims incurred = (Earned Premium)(Expected Loss Ratio)


 (1, 400, 000)(0.55)  770, 000

Reserve = (Expected Claims Incurred)  Losses Already Paid

 770, 000  250, 000  520, 000


2. During the first quarter of 2020, The Miller Insurance Company collect the following premium
amounts:

Month January February March


Premium Collected 120,000 150,000 180,000

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:

Incremental Loss Payments by Development Year


Accident Development Year
Year 0 1 2 3
2016 15,000 10,000 4,000 2,000
2017 20,000 18,000 6,000
2018 25,000 12,000
2019 30,000

There is no further development after year 3.

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:

The total claims paid in 2019 is the bottom diagonal.

Total claims = 30,000 + 12,000 + 6,000 + 2,000 = 50,000

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:

Development Years Link Ratio


1/0 2.00
2/1 1.25
3/2 1.10
4/3 1.05

There is no further development after four years.

The following table shows the total amount of claims paid through the end of December 2019:

Accident Year Cumulative Claim


Payment Through
12/31/2019
2016 10,000
2017 8000
2018 6000
2019 4000

Calculate the reserve using the chain ladder method for December 31, 2019.

Solution:

Accident Year Cumulative Cumulative Lag Factor Estimated


Claim Payment Total Loss
Through
12/31/2019
2016 10,000 1.05 10,500.00
2017 8000 (1.05)(1.10) 9,240.00
2018 6000 (1.05)(1.10)(1.25) 8,662.50
2019 4000 (1.05)(1.10)(1.25)(2.00) 11,550.00
Total 39,952.50

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:

Development Years Link Ratio


1/0 2.00
2/1 1.25
3/2 1.10
4/3 1.05

There is no further development after four years.

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:

a. The Loss Ratio method

Solution:

Expected Total Losses = (Earned Premium)(Expected Loss Ratio)

 (100, 000)(0.70)  70, 000

Reserve = Expected Total Losses  Paid Losses to Date =

70, 000  50, 000  20, 000


b. The claim ladder method

Solution:

Expected Total Losses = (Paid Losses to Date)(fUlt )

 (50, 000)  (1.25)(1.10)(1.05)   72,187.50

Reserve = Expected Total Losses  Paid Losses to Date =

72,187.50  50, 000  22,187.50


c. The Bornhuetter-Ferguson method

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:

Cumulative Loss Payments


through Development Month
Accident Earned Expected 12 24 36 48
Year Premium Loss Ratio
AY5 19,000 0.90 4,850 9,700 14,100 16,200
AY6 20,000 0.85 5,150 10,300 14,900
AY7 21,000 0.91 5,400 10,800
AY8 22,000 0.88 7,200

There is no development past 48 months.

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)

Expected Claims - AY5 = (19, 000)(0.90)  17,100


Expected Claims - AY6 = (20, 000)(0.85)  17, 000
Expected Claims - AY7 = (21, 000)(0.91)  19,110
Expected Claims - AY8 = (22, 000)(0.88)  19,360

 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 

Total Reserve  0  2203.75  7639.14  13,548.33  23,391.22


7. You are given the following information for a given accident year for a block of business with
case reserves:

i. Earned Premium = 1,000,000

ii. Expected Loss Ratio = 75%

iii. Claims paid to date = 450,000

iv. Case Reserves = 250,000

v. fUlt  1.15

Find the Total Actuarial Reserve using:

a. The Loss Ratio Method

Solution:

Expected Total Losses = (Earned Premium)(Expected Loss Ratio)

 (1, 000, 000)(0.75)  750, 000

Reserve = Expected Total Losses  Paid Losses to Date =

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

b. The Chain Ladder Method

Solution:

Expected Total Losses = (Paid Losses to Date + Case Reserves)(fUlt )

 (700, 000)(1.15)  805, 000

Reserve = Expected Total Losses  Paid Losses to Date =

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, 000, 000)(0.75)  750, 000

 1   1 
IBNR Reserve = (Expected Total Losses) 1   = (750, 000) 1    97,826
 fUlt   1.15 

Total Reserve = IBNR Reserve + Case Reserve = 97,826 + 250,000 = 347,826


8. Below is the reserve development from Table 3.5:

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.

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