Unbiased Development for Individual Claims - Taming the Wild Burning Cost

The ultimate cost of an unpaid individual claim follows a probability distribution, and usually will not be the exact point resulting from use of a loss development factor. So, when actuaries apply loss development factors to individual claims, they often create biased estimates of excess loss costs. Methods for creating a loss development probability distribution are developed. It is shown that the results of those methods are unbiased not only in terms of developing losses overall, but also projecting the ultimate costs in any layer. Methods to adjust the probability distribution for other development maturities and different claim handling are provided.

Keywords: Excess loss development, stochastic loss development factor, large deductible reserving, excess loss reserving, unbiased development