Essentially, in Fig. 7 we have two things occurring. First, there is a
$20 trend per lag. $20 is added to each entry in the proceeding
column. Second, there is a $20 shift in reporting. $20 shifts from
the first entry in a column to the second entry, $20 from the second
entry to the third, and so forth. I will show the table breaking out
the two steps. Only step 2 is shown in Fig. 7.
Lag 1 Lag 2 Lag 3
History Step 1 Step 2 Step 1 Step 2 Step 1 Step 2
$200 $220 $200 $220 $200 $220 $200
$200 $220 $220 $240 $240 $260 $260
$200 $220 $220 $240 $240 $260 $260
$200 $220 $220 $240 $240 $260 $260
$200 $220 $240 $260 $280 $300 $320 etc. etc.
The study note is only interested in showing the impact this shift in
reporting pattern has on claims-made and occurrence ratemaking.
Therefore only the Lag 1 column (claims-made) and the diagonal
(occurrence) are shown. The two totals represent the losses under each
of the different rating schemes.
The result of this exercise is that we notice that "Whenever there is a
sudden unexpected shift in the reporting pattern, the cost of mature
claims-made coverage will be affected very little if at all relative to
occurrence coverage." I believe this is the important point in this
example. I would make sure that I understood this point and try not to
get bogged down in the numbers in these figures. The past exam
problems seem to reflect this emphasis on this section of the text.