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Jing, Yi, Joseph Lebens, and Stephen Lowe. 2009. “Claim Reserving: Performance Testing and the Control Cycle.” Variance 3 (2): 161–93.
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  • Figure 1. Cross-validation in a regression analysis context
  • Figure 2. The actuarial control cycle for the claim reserving process
  • Figure 3. CABI performance test results—Paid chain-ladder method
  • Figure 4. CABI performance test results—Paid chain-ladder method
  • Figure 5. CABI—Percentage of estimated ultimate claims open at 42 months
  • Figure 6. CABI performance test results—Incurred chain-ladder method
  • Figure 7. CABI performance test results—Incurred chain-ladder method
  • Figure 8. CABI inflation-adjusted average case reserves
  • Figure 9. CABI comparison of paid and incurred chain-ladder errors
  • Figure 10. Illustration of combined variance of two methods
  • Figure 11. CABI performance test results—Case reserve development method
  • Figure 12. CABI performance test results—Reported count chain-ladder method
  • Figure 13. CABI performance test results—Case adequacy incurred chain-ladder
  • Figure 14. CABI comparison of adjusted and unadjusted ICLD errors

Abstract

Fundamentally, estimates of claim liabilities are forecasts subject to estimation errors. The actuary responsible for making the forecast must select and apply one or more actuarial projection methods, interpret the results, and apply judgment. Performance testing of an actuarial projection method can provide empirical evidence as to the inherent level of estimation error associated with its forecasts. Performance testing of alternative methods provides formal assurance that the actuary is using the best methods for the given circumstance, and also provides insight into the appropriate weight to give to the indications produced by each method. Performance testing is an integral part of the actuarial control cycle associated with the loss reserving process. It provides the necessary feedback loop to the actuary, assuring that he or she is not overconfident about his or her forecasts. This paper describes how to construct sound performance tests, consistent with statistical cross-validation, within the reserving control cycle. It illustrates the application of the techniques via a case study, including some interesting empirical results.