Claims Development by Layer: The Relationship between Claims Development Patterns, Trend and Claim Size Models

The purpose of Charles Cook’s 1970 paper Trend and Loss Development Factors was to address the “overlap fallacy.” That is, the focus of that paper was to demonstrate that trend and claims development were mutually exclusive adjustments. While this is certainly true, it should also be understood that there is a relationship between limited claims development patterns and trend factors. The “connector” between claims development patterns and trend is the claim size model. This relationship is critical to analyzing “real word” data which is rarely available on a ground-up, unlimited basis and where the implicit assumption of trend in a single direction may not be appropriate.
This paper presents a demonstration of that relationship and also provides an approach to adjust development patterns for a particular claim size layer in order to calculate a development pattern for any other layer. As importantly, the approach discussed is designed to produce models that are internally consistent with respect to development patterns, trend factors and size of loss models (increased / decreased limit factors).
Keywords: development patterns, excess layer