Fall 2017 Q23 b)

Comments

• Graham

  October 2023

  Alright, let's break this down step by step:

  1. Should the trended tail severity increase as the development age increases?
     • Generally speaking, as claims age or mature, they tend to become more expensive. This is due to various factors like increased medical costs, legal fees, or even the discovery of previously unknown information about a claim. Trending is used to adjust historical data to a common level, often the current rate level. When you trend the tail severities, you're accounting for things like inflation or changes in the general price level, which typically makes things more expensive over time. Thus, in many scenarios, you would expect the trended tail severity to increase as the development age increases.
  2. Why is this the case?
     • The core reason is the inherent uncertainty in claims as they age. As claims mature, some might get settled for higher amounts than initially anticipated. Medical treatments might become more expensive, or litigation might take longer than expected. Trending helps adjust past data for these changes, making older data more compatible with the current environment.
  3. When and how are trended tail severities used?
     • Trended tail severities are used when trying to predict future claims costs. Insurers often have data on claims for many years but might lack data for more recent years or for claims that will mature in the future. By trending the older data, they can make better predictions about these future claims costs. This is particularly useful for long-tail lines of insurance, where claims can take years or even decades to settle.
  4. It only considers the incremental severities?
     • Typically, yes. When calculating trended tail severities, the focus is on the incremental severities — that is, the additional costs associated with a claim as it ages. By trending these incremental values, insurers can get a sense of how a claim's cost will evolve over time, adjusted for current price levels.