Modeling Loss Emergence and Settlement Processes

Abstract: The CAS Loss Simulation Model Working Party (LSMWP) has been charged by the Committee on Dynamic Risk Modeling Committee with creating a simulation model of the processes of loss emergence and settlement, commonly known as loss development, that underlie the loss “triangles” and other statistics used to estimate loss reserves. The goal was to create a tool that researchers could use to generate claims that would be summarized into loss development triangles and complete rectangles which could then be used to test loss reserving methods and models.

Motivation: Actuaries need tools that will enable them to better understand the underlying loss development process and will aid them in determining what methods and models work best in different reserving situations.

Method: The LSMWP first developed a prototype model that met its basic objectives. It then engaged a consultant to develop an open-source model that could be applied and further developed by the CAS membership. Results. The open-source model developed by the consultant is documented in this paper, along with the testing which validated the model.

Conclusions: A valuable tool has been created for use by the actuarial community in its research work on reserving methods and models. We encourage actuaries to perform additional validation tests of the model and contribute model enhancements.

Availability: This report and the associated model are available by clicking on the LSMWP link on the Committee on Dynamic Risk Modeling (DRM) page on the CAS Web Site (www.casact.org/research/drm).

Keywords: loss reserving; simulation model; reserve variability; reporting pattern; payment pattern; open-source model.