A New Method of Estimating Loss Reserves

This paper introduces a new method for estimating loss reserves. The method is fundamentally different from other loss reserving methods because it explicitly assumes that the evolution of the incremental incurred loss for an accident year is the result of a random split of the ultimate loss for that accident year into separate pieces that are observed in each development year over the claim settlement period. The nature of the random split and the pattern of the evolution of incremental incurred loss must be specified by the reserving actuary, thus giving the method tremendous flexibility. A key feature of this method is that it provides loss development factors without any knowledge of the distribution of the ultimate loss and without the actual cumulative incurred loss. Thus this method is suitable for calculating reserves for new lines of business where there is little or no loss settlement data.