Disposal rate method
Hi,
In a disposal rate method question, if are asked to first check the consistency and stability of the trend in the paid data using a diagnostic, we use CUMULATIVE paid dollars and counts to conclude, and then, to calculate a trend to finally apply, we use an average trend rate from the INCREMENTAL paid severity triangle if it's not given already. Am I right?
I don't get why we can't check stability of trend rates [in the situation mentioned above] using incremental paid severity triangle as a diagnostic only and then use the trend rate directly in the calculation. Would that be wrong?
Thanks
Comments
Are you referring to a particular exam question here? (Checking consistency and stability of the trend?)
For example, in Spring 2014, Q18,
The examiners' report said that the candidate can apply FS disposal rate method on the basis of the following reasons:
They specifically mentioned and I am directly quoting,
"Some were confused by the severity of cumulative paid losses and the severity of incremental paid amount at each age".
So, my question can we directly check the Incremental paid severity trend also as a diagnostic? Would it be stable too like cumulative paid severity? Also, in that case I would directly know the trend rate to apply in the disposal rate technique.
There are no strict rules for this but it's generally better to diagnose and select a trend based on cumulative paid severity rather than the incremental paid severity. The incremental paid severity is more volatile because it uses data in the tail of triangle. If you try to select a trend based on incremental paid severity in this problem, you'll get something that doesn't make sense for age 24 months.
I'm not absolutely sure what the examiners meant when they said candidates were confused by the severity of cumulative paid losses and the severity of incremental paid amount at each age. Maybe they just meant that some candidates tried using incremental paid severity to select a trend and then got confused when they couldn't make a sensible selection from the incremental triangle.
On contrast, note it's true that in 2014.Fall Q17 on the disposal rate method, they used the incremental paid severity triangle to examine and select trends, but of course that problem was constructed to be solvable using the disposal rate method.