I believe he means that, since his model uses only half as much data as the
typical real-world practice (one year of history instead of two), it will
have twice as much variance due to random errors.
>Ref. Cook, p. 10
>He says, "In the case of a non-random trend in average speed of payment,
the
>[paid loss development] method will be far less responsive than the
present
>[incurred loss development] approach." How can this be? After all,
incurred
>doesn?t by definition react to changes in claim payment. It seems to me
that
>the incurred development method would be UNresponsive.
You & Cook appear to be interpreting the word "responsive" in opposite
ways.
Suppose ultimate losses for each year will be stable at $1,000,000, and
that in the past $500,000 has typically been paid as of 15 months. Your DF
will be 2.0. Then because courts are more clogged etc, you start to settle
& pay claims more slowly, and for the latest year you've only paid $400,000
at 15 months (although true ultimate losses will once again turn out to be
$1 million). Application of the paid development method will yield an
incorrect estimated ultimate of 2.0*$400,000 = $800,000. You're saying the
paid method is "responsive" because it has produced a different (incorrect)
ultimate in response to the change in payment pattern. Cook is calling it
"unresponsive" because it has failed to adapt correctly to changed
circumstances. You agree on what's happening, but you're using the label
"responsive" differently.
By the way, a change in payment patterns probably would have some effect on
reported losses, and therefore distort the incurred development method as
well, to a smaller extent.
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