A Comparative Study of the Performance of Loss Reserving Methods Through Simulation

Actuaries are often asked to provide a range or confidence level for the loss reserve along with a point estimate. Traditional methods of loss reserving do not provide an estimate of the variance of the estimated reserve and actuaries use various ad hoc methods to derive a range for the indicated reserve. Regression models for loss reserving are getting increasing attention in actuarial research as they provide an estimate of the variance of the loss reserve, along with a point estimate. However, these methods are rarely used in practice, both because of their complexity and the lack of their historical use. In this paper we use a Monte Carlo simulation method to compare loss reserve estimation methods, including traditional methods, and regression based methods of loss reserving. Our approach is similar to that of Stanard [S], where he compares several traditional actuarial methods using simulation techniques. However, we use different methods for simulating loss triangles, and compare the estimated reserve based on several characteristics.