Fall 2018 #17
In calculating the 1 year loss reserve development, why are we able to simply calculate the difference in one year incurred losses? Wouldn't the increase in incurred losses be due to a combination of an increase in paid losses and reserves? I don't understand why we don't construct a reserve triangle (Part 2 minus Part 3) and then find the 1 year loss reserve development from that triangle. What am I missing here? Thanks!
Comments
The increase in paid losses also affect the one-year reserve development. An increase in Paid is a decrease in Reserve. That's why we take the change in incurred losses.
I am also confused how we can simply take the differences from the incurred table. Is that not just simply loss development as opposed to "loss reserve" development? To find development in the actual loss reserves would we not have to account for paid vs. reserve split?
nevermind, I figured it out drawing a diagram to realize subtracting the incurred columns does result in loss reserve development
Ok, good.
I am struggling with the term "loss reserve development" - shouldn't we be thinking of it as incurred loss development? Loss reserves would develop downwards over time as payments are made.
Think of it this way. You start out with resv0. Payments are made on that reserve between 0 and 1. Those payments reduce resv0. The remaining reserves are re-evaluated, and made to be resv1.
This is the loss reserve development in its entirety. The sum of these movements can be derived by subtracting incurred0 from incurred1.