An incremental loss ratio method using prior information on calendar year effects.

ABSTRACT

In a run-off triangle external factors can have a similar influence on all incremental losses of the same calendar year. This can distort the triangle such that reserving methods like chain ladder or the loss ratio method do not work properly. A very recent example of such an external factor is the Covid-19 pandemic. In many countries, the insurance industry is in the process of establishing market knowledge about the impact of the pandemic on premiums and losses. We extend the additive claims reserving model to allow for calendar year effects and develop a variant of the incremental loss ratio method (also known as the additive method) that can make use of such market knowledge. We derive formulas for the mean squared error of prediction and provide a detailed numerical example. Supplementary Information The online version contains supplementary material available at 10.1007/s13385-022-00315-3.