Trend and Loss Development Factors

During the past year or two it has become apparent that there exist widespread misconceptions about trend and loss development factors. Rather than surface misunderstandings, they appear to result from fundamental confusion between the data base from which the factors are derived and the purpose which they serve. These are essentially laymen’s errors, of the kind one might expect to fade away after brief consideration, but they have been surprisingly persistent. Indeed, I have found in private conversations that the overlap fallacy has been uncritically accepted even by many actuaries. The problem may be due to a lack of serious consideration of these difficult concepts outside of the adversary proceedings of disputed rate filings; there has been surprisingly limited treatment of them in the Proceedings. The purpose of this paper is to try to clarify a few of the problem areas, and if possible to refute some errors.