A Reflection on the Loss Ratio Method in the automobile Third Party Liability Insurance Loss Reserving

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Atatalab Fatemeh; Payandeh NajafAbadi Amir Teimour

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Journal Paper

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Journal: Iranian Journal of Insurance Research Year:2022 | Volume:37 | Issue:1 Page(s): 9-42

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Title

A Reflection on the Loss Ratio Method in the automobile Third Party Liability Insurance Loss Reserving

Author(s)

Atatalab Fatemeh | Payandeh NajafAbadi Amir Teimour | Issue Writer Certificate

Keywords

Loss reserve

Chain ladder

Claim development result

Mean square error of prediction

Abstract

Objective: To predict Loss reserve using a stochastic approach and compare it with the proposed deterministic methods in the central insurance directive of the method of estimating and controlling the adequacy of Loss reserves in the field of automobile third party liability insurance. Methodology: This research is an applied-development study in terms of its objectives and is considered as an analytical study. In this paper, stochastic and definite methods are used to calculate the Loss reserve. To evaluate the model, a loss data set of an Iranian insurance company in the period 2011 to 2019 is considered; using this data set as well as designing a run-off triangle generation algorithm, Loss reserve was analyzed based on the studied models by R software. The run-off triangle generation algorithm designed in this paper has the ability to generate a double run-off triangle (triangles of number and amount of loss) simultaneously. In this paper, in addition to using common methods of back-testing the results, a solution is proposed to select the best reserving model based on the calculation of the uncertainty of consecutive triangles. Findings: Due to the definiteness of the proposed central insurance models, the use of stochastic approaches was emphasized in this paper. In the central insurance approach, it is not possible to calculate CDR and MSEP. These two criteria are very valuable in response to the insurance company's solvency and risk-based supervision. In this article, several Loss reserve methods were used to show how the best method can be selected for Loss reserve. The dynamic stochastic approach used in this paper allows insurance companies, in addition to estimating the reserve point, to determine the safe distance for it and thus save sufficient capital to fulfill their obligations. Conclusion: The results of the calculations in this paper indicate that the method based on the loss ratio is biased and the results are not reliable for insurance companies. The simulation results also confirm the inadequacy of the method based on the damage ratio. The results of the study show that it is not possible to recommend a fixed and uniform method for all companies. It is the insurance company's duty to find the most appropriate method for its company and to introduce it to the supervisory body.

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APA: Copy

Atatalab, Fatemeh, & Payandeh NajafAbadi, Amir Teimour. (2022). A Reflection on the Loss Ratio Method in the automobile Third Party Liability Insurance Loss Reserving. IRANIAN JOURNAL OF INSURANCE RESEARCH (SANAAT-E-BIMEH), 37(1 ), 9-42. SID. https://sid.ir/paper/985191/en

Vancouver: Copy

Atatalab Fatemeh, Payandeh NajafAbadi Amir Teimour. A Reflection on the Loss Ratio Method in the automobile Third Party Liability Insurance Loss Reserving. IRANIAN JOURNAL OF INSURANCE RESEARCH (SANAAT-E-BIMEH)[Internet]. 2022;37(1 ):9-42. Available from: https://sid.ir/paper/985191/en

IEEE: Copy

Fatemeh Atatalab, and Amir Teimour Payandeh NajafAbadi, “A Reflection on the Loss Ratio Method in the automobile Third Party Liability Insurance Loss Reserving,” IRANIAN JOURNAL OF INSURANCE RESEARCH (SANAAT-E-BIMEH), vol. 37, no. 1 , pp. 9–42, 2022, [Online]. Available: https://sid.ir/paper/985191/en

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