Interpolation Hacks and their Efficacy

Actuaries are consistently faced with the decision of how to interpolate loss development factors. Methods vary from linear to more theoretical. This paper explores how various methods hold up to actual data and each other by estimating errors in reserve prediction when using paid loss development, incurred loss development and Bornhuetter Ferguson methods. It also lays out a variety of methods for actuaries to use. Lastly, this paper adds an additional process to account for unique situations such as seasonal fluctuations in claims activity. Along with this paper, I have included a practical tool programmed with interpolation formulae and the seasonal method.

Keywords: Interpolation, Development, Quarterly Reserving