Fall 2016 Q24

OwarnockOwarnock
in Odomirok.16-17-SAO

Can you further explain what the point estimate is / what it represents? In the problem is the point estimate the sum of the gross case loss and LAE reserves and the point estimate for gross IBNR reserves? Is there anything else the problem could have thrown in that we would have had to include in calculating the point estimate?

Comments

  • grahamgraham

    The point estimate is the result of the actuary performing their reserve analysis. So if they started with a triangle and calculated the ultimate loss using an appropriate method (like the standard development method) and then subtracted the reported loss, they would get an estimate for IBNR. That IBNR estimate would be the point estimate. In this problem, the IBNR point-estimate is 20,000.

    In this problem, they add the IBNR point-estimate to the "Gross Case Loss and LAE Reserves" (which is what is actually in the financial statements) to get the actuary's point-estimate for total reserves of 60,000. So the "Gross Case Loss and LAE Reserves" is not itself an estimate because that what's actually carried (excluding IBNR). Then on line C, they show 58,000 for the "Management Booked Reserve" which implies that management did not use the actuary's point-estimate of 20,000. For whatever reason, they decided to reduce it to 18,000 and that's why the total carried reserve is 58,000.

    I'm not sure there's really any other way to ask this question. (Maybe they could provide loss and LAE separately so you'd have to add them together.)

  • OwarnockOwarnock

    Thank you!

  • lyee0331lyee0331

    Hi, I am still not understanding how to get the values for A: Range of Estimates for Reserve. How do we calculate 54,000 and 66,000 for net and gross?

  • grahamgraham

    The range calculation of 54,000 to 66,000 is based on these 2 pieces of information given in the problem:

    The first table above implies the actuary's point-estimate is 40,000 + 20,000 = 60,000. Then the second piece of information says the reasonable range is + or - 10%. That would be 6,000, so the range would then be

    • (60,000 - 10% of 60,000) = 60,000 - 6,000 = 54,000 for the low end
    • (60,000 + 10% of 60,000) = 60,000 + 6,000 = 66,000 for the HIGH end

    Also, net and gross are the same because under the second bullet point above, there is no ceded reinsurance.

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