Performance Testing Aggregate and Structural Reserving Methods: A Simulation Approach

Aggregate financial data histories are extensively used by actuaries in projecting ultimate liabilities, but the claim occurrence, reporting, and settlement process which generates these data is not perfectly understood, rarely modeled directly, and not incorporated into the structure of most popular reserving methods. This paper utilizes today’s computer applications to create an automated simulation tool. This module allows the user to choose statistical assumptions for each element of the claims process and specify the structure of the simulation experiment. It then generates random paid loss and claim count histories based on these inputs. The module is used to perform an experimental test of the performance of aggregate versus structural reserving methods over tune. The methods chosen are the paid loss development method and a new “closed claim cost” structural method presented in the paper. In each trial, a database of ten accident years at ten annual evaluations is simulated. Then both methods are run at five successive calendar year evaluations of the simulated data. Several error functions are tabulated at each valuation date and the speed of the approach of each method’s indication to the true value of the aggregate costs is examined. Suggestions for enhancement of the simulation model and performance tests follow.