2016_1_Spring_13
Why are we adding the 6k to the average unpaid claim estimate of 10k? Doesn't the question imply the answer simply to be 6k?
Am I completely misinterpreting the wording in "A regulation has been proposed .... hold total IBNR reserves using
a schedule of IBNR reserves per open claim based on the age of a cohort of claims"
Number of claims outstanding for 2011: 1400
Since its 48 months at year end 2014, 6k.
Comments
Question asks for "average unpaid claim severity." This term is a bit ambiguous, because severity usually refers to paid+reserve on the average claim. Here, they use it to mean average unpaid (or average reserves) on an open claim. Unpaid is composed of case reserve and IBNR reserve. Average case reserve is derived to be 10K. So, average unpaid is 10K+6K = 16K.
I'm confused why they remove both the paid and the IBNR from the incurred to get the unpaid. Shouldn't we only be removing the paid amount from incurred to get the unpaid?
The solution refers to "Average Unpaid Claim Estimate" and "Average Unpaid Claim Severity." These are poor choices of terminology. "Average Unpaid Claim Estimate" really means average case reserve. And "Average Unpaid Claim Severity" really means average unpaid loss.
To get the first one, they need to remove paid and IBNR to get case reserve. To get the second one, they add average case reserve and average IBNR.
Wow, that is super ambiguous. Not sure how I was supposed to figure out that "average unpaid claim estimate" is different than "average unpaid loss" even though they sound exactly the same.
I am still lost with this problem. The question asks for "average unpaid claim severity". According to your comment, this is average case reserve + average IBNR. So why do we subtract parts 2-3-4? The examiner's report says "it was important to know that IBNR is included in part 3 of schedule P". Is this a typo that should have said part 3?
They used the term "average unpaid claim estimate" only in the sample solution, not in the body of the question. You would have made out fine, as long as you understood that "average unpaid claim severity" meant average case + ibnr.
We subtract parts 3 and 4 from part 2 to get the aggregate case reserve. Then, you divide this by the number of open claims to get average case reserve.
Examiner's comment has a typo in it. It should say ". . .ibnr is included in part 4. . ."
Thanks!
Sure, good luck.
I'm not sure I understand why the unpaid case reserve estimate for AY 2011 is calculated as 80M - 54M - 12M. With the new IBNR requirement, wouldn't we need to replace the 12M with 8.4M, i.e., 1400 (number of AY 2011 claims) * $6000 (new IBNR requirement)?
The problem gives both the 12M as Part 4 IBNR and the information related to the new IBNR requirement. So, using either should be acceptable. The answer key gives 12M as the only choice. I don't know if they would accept the latter.