A Simulation Test of Prediction Errors of Loss Reserve Estimation Techniques

Contains fully described simulation models. Abstract: This paper uses a computer simulation model to measure the expected value and variance of prediction errors of four simple methods of estimating loss reserves. Two of these methods are new to the Proceedings. The simulated data triangles that are tested are meant to represent sample sizes typically found in individual risk rating situations. The results indicate that the commonly used age-to-age factor approach gives biased estimates and is inferior to the three other methods tested. Theoretical arguments for the source of this bias and a comparison of two of the methods are presented in the Appendices.