Estimating and Incorporating Correlation in Reserve Variability

An actuarial analysis of a book of reserves usually focuses on ultimate loss estimates by exposure period (accident year, report year, etc.) and by business segment. If an actuary is interested in the distribution of total reserves for all segments and exposure periods combined, then the actuary must find a way to combine the distribution estimates from the various parts analyzed. In this paper we present a method that can be used to estimate the correlation of reserve estimates among the various components analyzed, allowing the actuary to combine the resulting distributions in a meaningful way.