Strategies for Modeling Loss Development: Curve Fitting, Credibility, and Layer Adjustments
By Uri A. Korn
This paper discusses some strategies to better handle the modeling of loss development patterns. Some improvements to current curve and distributionfitting strategies are shown, including the use of smoothing splines to help the modeled patterns better fit the data. A strategy is shown for applying credibility to these curves that produces results that are wellbehaved and that can be implemented without the use of Bayesian software. Next, it is shown how the fitted models can be leveraged to help determine the optimal lookback period to use for selecting LDFs as well as to calculate the parameter and process error distributions. Lastly, a technique is demonstrated for making adjustments to LDFs for different limits, loss caps, and attachment points.
Keywords: Loss development factors, credibility, generalized additive models, splines