Loss development

Category: Actuarial fundamentals · Reviewed by Tim Roche, Director · PI & Commercial · Last reviewed

Loss development

Loss development is the change in the recorded value of claims for a given accident, underwriting or report year as more information becomes available over time. Reported losses initially understate ultimate losses because of:

• IBNR (claims not yet reported).
• IBNER (claims reported but with case reserves below ultimate cost).
• Late reopening of closed claims.
• Litigation outcomes producing settlement at multiples of the case reserve.

Loss development factors (LDFs)

LDFs are multipliers applied to losses at a particular development age (e.g. 12 months) to project them to ultimate. A typical pattern for long-tail casualty might be:

Age (months)	Cumulative LDF to ultimate
12	4.50
24	2.10
36	1.55
48	1.28
60	1.15
120	1.02
180 (ultimate proxy)	1.00

Factors are derived from historical loss triangles, usually by the chain-ladder method.

Long-tail vs short-tail

• Short-tail lines (property, motor own damage) reach ultimate in 1–3 years.
• Long-tail lines (EL, PI, motor BI, casualty reinsurance) can take 10+ years.
• Latent classes (asbestos, pollution, abuse) can develop over decades.

References

• Mack, T. (1993). Distribution-free calculation of the standard error of chain ladder reserve estimates. ASTIN Bulletin 23(2).
• IFoA. General insurance reserving practice.
• Schmidt, K.D. and Wünsche, A. (1998). Chain ladder, marginal sum and maximum likelihood estimation.

Cross-references

• Loss triangle
• Chain ladder method
• IBNR
• IBNER

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