Main Content

Mean Square Error of Prediction for Estimated Ultimate Claims

This example shows a workflow for estimating ultimate claims using a developmentTriangle object with simulated reported claims and then calculating the corresponding mean square error of prediction (MSEP).

Actuaries use different techniques to estimate the ultimate claims for different years. In addition to the claim values, an actuary needs to know how well the estimates predict the outcomes of random variables and the uncertainties in the estimates for the ultimate claims. To measure the quality of the estimated ultimate claims, you can calculate the MSEP.

Load Data

load('InsuranceClaimsData.mat');
disp(head(data));
    OriginYear    DevelopmentYear    ReportedClaims    PaidClaims
    __________    _______________    ______________    __________

       2010             12               3995.7          1893.9  
       2010             24                 4635          3371.2  
       2010             36               4866.8          4079.1  
       2010             48               4964.1            4487  
       2010             60               5013.7          4711.4  
       2010             72               5038.8          4805.6  
       2010             84                 5059          4853.7  
       2010             96               5074.1          4877.9  

Create developmentTriangle

Create a developmentTriangle object and use claimsPlot to visualize the developmentTriangle. For more information on unpaid claims estimation, see Overview of Claims Estimation Methods for Non-Life Insurance

dTriangle = developmentTriangle(data,'Origin','OriginYear','Development','DevelopmentYear','Claims','ReportedClaims');
dTriangleTable = view(dTriangle);
% Visualize the development triangle
claimsPlot(dTriangle);

Figure contains an axes object. The axes object with title Cumulative Claims Development contains 10 objects of type line. These objects represent 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019.

Analyze developmentTriangle

Use linkRatios to calculate the age-to-age factors.

factorsTable = linkRatios(dTriangle);

Use linkRatioAverages to calculate the averages of the age-to-age factors.

averageFactorsTable = linkRatioAverages(dTriangle);
dTriangle.SelectedLinkRatio = averageFactorsTable{'Volume-weighted Average',:};
dTriangle.TailFactor = 1;
selectedFactorsTable = cdfSummary(dTriangle);

Display the full development triangle using the fullTriangle function.

fullTriangleTable = fullTriangle(dTriangle);
disp(fullTriangleTable);
              12        24        36        48        60        72        84        96       108       120      Ultimate
            ______    ______    ______    ______    ______    ______    ______    ______    ______    ______    ________

    2010    3995.7      4635    4866.8    4964.1    5013.7    5038.8      5059    5074.1    5084.3    5089.4     5089.4 
    2011      3968    4682.3    4963.2    5062.5    5113.1    5138.7    5154.1    5169.6    5179.9    5185.1     5185.1 
    2012      4217    5060.4      5364    5508.9    5558.4    5586.2    5608.6    5625.4    5636.7    5642.3     5642.3 
    2013    4374.2    5205.3    5517.7    5661.1    5740.4    5780.6    5803.7    5821.1    5832.7    5838.6     5838.6 
    2014    4499.7    5309.6    5628.2    5785.8    5849.4    5878.7    5900.8    5918.5    5930.3    5936.3     5936.3 
    2015    4530.2    5300.4    5565.4    5715.7    5772.8    5804.1    5825.9    5843.4    5855.1      5861       5861 
    2016    4572.6    5304.2    5569.5    5714.3    5775.4    5806.7    5828.6    5846.1    5857.7    5863.6     5863.6 
    2017    4680.6    5523.1    5854.4    6000.9    6065.1      6098    6120.9    6139.3    6151.6    6157.7     6157.7 
    2018    4696.7    5495.1    5804.4    5949.6    6013.3    6045.9    6068.6    6086.8      6099    6105.1     6105.1 
    2019    4945.9    5819.2    6146.7    6300.5    6367.9    6402.4    6426.5    6445.8    6458.7    6465.2     6465.2 

Compute the total reserves using ultimateClaims.

IBNR = ultimateClaims(dTriangle) - dTriangle.LatestDiagonal;
IBNR = array2table(IBNR, 'RowNames', dTriangleTable.Properties.RowNames, 'VariableNames', {'IBNR'});
IBNR{'Total',1} = sum(IBNR{:,:});
disp(IBNR);
              IBNR 
             ______

    2010          0
    2011     5.1857
    2012      16.89
    2013     34.886
    2014     57.583
    2015     88.148
    2016     149.34
    2017     303.29
    2018     609.99
    2019     1519.3
    Total    2784.6

Calculate Estimated Standard Deviations

The developmentTriange link ratios are estimated using the formula:

fjˆ=i=0I-j-1Ci,j+1i=0I-j-1Ci,j

Along, with the link ratios, the variance parameters are estimated as:

σjˆ2=1I-j-1i=0I-j-1Ci,j(Ci,j+1Ci,j-fjˆ)2

Since the last variance parameter σJ-12 cannot be estimated with the estimator σˆJ-12, the Mack extrapolation method is used to estimate of σJ-12:

σˆJ-12=min{σˆJ-24σˆJ-32;σˆJ-32;σˆJ-22}

Using this formula, you can compute the estimated conditional process standard deviations.

currentSelectedFactors = dTriangle.SelectedLinkRatio;
estimatedStandardDeviations = currentSelectedFactors;
for i=1:width(estimatedStandardDeviations)-1
    estimatedStandardDeviations(1,i) = sqrt(sum(((factorsTable{1:end-i,i} - currentSelectedFactors(:,i)).^2).*dTriangleTable{1:end-i,i}) / (height(dTriangleTable)-i-1));
end
estimatedStandardDeviations(1,end) = sqrt(min([estimatedStandardDeviations(1,end-1)^4 / estimatedStandardDeviations(1,end-2)^2, estimatedStandardDeviations(1,end-2)^2, estimatedStandardDeviations(1,end-1)^2]));

Calculate Reserves and Estimated Conditional Process Standard Deviations

Using the latest developmentTriange diagonal information and projected ultimate claims from the developmentTriangle object, the ReservesTable is calculated.

h = height(dTriangleTable);
ReservesTable = array2table(NaN(h, 9));
ReservesTable.Properties.RowNames = dTriangleTable.Properties.RowNames;
ReservesTable.Properties.VariableNames = {'Latest Diagonal','Projected Ultimate Claims','Reserves','Estimated conditional process standard deviation','Estimated conditional variational coefficient','Conditional Var_hat','variation for Var_hat','MSEP','MSEP Uncertainty'};
ReservesTable.("Latest Diagonal") = dTriangle.LatestDiagonal;
ReservesTable.("Projected Ultimate Claims") = ultimateClaims(dTriangle);
ReservesTable.("Reserves") = IBNR.IBNR(1:end-1,:);

Estimate the conditional process variance for the ultimate claim of a single accident year as:

Varˆ(Ci,J|DI)=(Ci,JˆCL)2j=I-iJ-1σjˆ2/fjˆ2Ci,jˆCL

and estimate the conditional process variance for aggregated accident years as:

Varˆ(i=1ICi,J|DI)=i=1IVarˆ(Ci,J|DI)

Calculate the estimated conditional variational coefficient for origin year i relative to the estimated reserves as:

VCOi=VCOˆ(Ci,J-Ci,I-i|DI)=Varˆ(Ci,J|DI)12Ci,JˆCL-Ci,I-i

summationFactors = zeros(1,h);
for i=length(summationFactors)-1:-1:1
    summationFactors(i) = (estimatedStandardDeviations(1,i)^2 / currentSelectedFactors(1,i)^2) / dTriangle.LatestDiagonal(h-i+1) + summationFactors(i+1);
end
summationFactors = fliplr(summationFactors)';
ReservesTable.("Estimated conditional process standard deviation") = sqrt(ReservesTable.("Projected Ultimate Claims").^2 .* summationFactors);
ReservesTable.("Estimated conditional variational coefficient") = ReservesTable.("Estimated conditional process standard deviation") ./ ReservesTable.("Reserves") * 100;
ReservesTable('Total',:) = array2table([NaN, NaN, NaN, NaN, NaN, NaN, NaN, NaN, NaN]);
ReservesTable{"Total","Reserves"} = sum(ReservesTable.("Reserves")(1:end-1));
ReservesTable{"Total","Estimated conditional process standard deviation"} = sqrt(sum(ReservesTable.("Estimated conditional process standard deviation")(1:end-1).^2));
ReservesTable{"Total","Estimated conditional variational coefficient"} = ReservesTable{"Total","Estimated conditional process standard deviation"} / ReservesTable{"Total","Reserves"} * 100;
disp(ReservesTable(:,(2:5)));
             Projected Ultimate Claims    Reserves    Estimated conditional process standard deviation    Estimated conditional variational coefficient
             _________________________    ________    ________________________________________________    _____________________________________________

    2010              5089.4                    0                                0                                               NaN                   
    2011              5185.1               5.1857                        0.0072309                                           0.13944                   
    2012              5642.3                16.89                         0.011214                                          0.066397                   
    2013              5838.6               34.886                         0.014452                                          0.041426                   
    2014              5936.3               57.583                           2.7832                                            4.8333                   
    2015                5861               88.148                           5.8489                                            6.6353                   
    2016              5863.6               149.34                           11.634                                            7.7906                   
    2017              6157.7               303.29                           22.586                                            7.4472                   
    2018              6105.1               609.99                           36.512                                            5.9856                   
    2019              6465.2               1519.3                           77.982                                            5.1329                   
    Total                NaN               2784.6                            90.01                                            3.2324                   

In addition to these claculated estimates, you can obtain the estimator for the conditional estimation error for origin year i as:

Varˆ(Ci,JˆCL|DI)=Ci,I-i2(j=I-iJ-1(fjˆ2+σjˆ2Sj[I-j-1])-j=I-iJ-1fjˆ2)

where

Sj[I-j-1]=i=0I-j-1Ci,j

factor1 = zeros(h,1);
factor2 = zeros(h,1);
factor1(2) = currentSelectedFactors(1,h-1)^2 + estimatedStandardDeviations(1,h-1)^2/sum(dTriangleTable{1,h-1});
factor2(2) = currentSelectedFactors(1,h-1)^2;
for i = 3:length(factor1)
    factor1(i) = (currentSelectedFactors(1,h-i+1)^2 + estimatedStandardDeviations(1,h-i+1)^2/sum(dTriangleTable{1:i-1,h-i+1})) * factor1(i-1);
    factor2(i) = currentSelectedFactors(1,h-i+1)^2 * factor2(i-1);
end
Var_hat = sqrt(dTriangle.LatestDiagonal.^2 .* (factor1 - factor2));

ReservesTable.("Conditional Var_hat")(1:end-1) = Var_hat;
ReservesTable.("variation for Var_hat")(1:end-1) = ReservesTable.("Conditional Var_hat")(1:end-1) ./ ReservesTable.("Reserves")(1:end-1) * 100;

Using the previous formulas, the estimator for the conditional MSEP of the ultimate claim for a single origin year i is:

msepCi,J|DIˆˆ(Ci,JˆCL)=(Ci,JˆCL)2j=I-iJ-1σjˆ2fjˆ2(1Ci,jˆCL+1Sj[I-j-1])

And the estimator for the conditional MSEP of the ultimate claim for aggregated origin years is:

msepiCi,J|DIˆˆ(i=1ICi,JˆCL)=i=1ImsepCi,J|DIˆˆ(Ci,JˆCL)+21i<kICi,JˆCLCk,JˆCLj=I-iJ-1σjˆ2/fjˆ2Sj[I-j-1]

summationFactorsMSEP = zeros(h,1);
for i=2:length(summationFactorsMSEP)
    summationFactorsMSEP(i) = (((estimatedStandardDeviations(1,h-i+1)^2 / currentSelectedFactors(1,h-i+1)^2)) * (inv(dTriangle.LatestDiagonal(i)) + inv(sum(dTriangleTable{1:i-1,h-i+1})))) + summationFactorsMSEP(i-1);
end
msep = sqrt(ReservesTable.("Projected Ultimate Claims")(1:end-1).^2 .* summationFactorsMSEP);
ReservesTable.MSEP(1:end-1) = msep;
ReservesTable.("MSEP Uncertainty")(1:end-1) = ReservesTable.MSEP(1:end-1) ./ ReservesTable.("Reserves")(1:end-1) * 100;

ReservesTable{'Total','Conditional Var_hat'} = sqrt(sum(ReservesTable.("Conditional Var_hat")(1:end-1).^2));
ReservesTable{'Total','variation for Var_hat'} = ReservesTable{'Total','Conditional Var_hat'} / ReservesTable{'Total','Reserves'} * 100;

disp(ReservesTable(:,[2,3,6,7]));
             Projected Ultimate Claims    Reserves    Conditional Var_hat    variation for Var_hat
             _________________________    ________    ___________________    _____________________

    2010              5089.4                    0                  0                    NaN       
    2011              5185.1               5.1857          0.0072985                0.14074       
    2012              5642.3                16.89          0.0099066               0.058655       
    2013              5838.6               34.886           0.011503               0.032972       
    2014              5936.3               57.583             1.4539                 2.5248       
    2015                5861               88.148             2.7754                 3.1486       
    2016              5863.6               149.34             5.0379                 3.3735       
    2017              6157.7               303.29             9.1852                 3.0285       
    2018              6105.1               609.99             13.941                 2.2854       
    2019              6465.2               1519.3             28.137                  1.852       
    Total                NaN               2784.6              33.25                 1.1941       

Calculate MSEP

Measure the quality of the estimated ultimate claims by calculating the MSEP and MSEP Uncertainty.

summationFactorsCovarianceTerm = zeros(h,1);
for i=2:length(summationFactorsCovarianceTerm)
    summationFactorsCovarianceTerm(i) = ((estimatedStandardDeviations(1,h-i+1)^2 / currentSelectedFactors(1,h-i+1)^2) / sum(dTriangleTable{1:i-1,h-i+1})) + summationFactorsCovarianceTerm(i-1);
end

totalSum = 0;
for i = 2:h
totalSum = totalSum + sum(dTriangle.LatestDiagonal(i,1) * fullTriangleTable{i+1:end, h-i+1} * summationFactorsCovarianceTerm(i));
end

covarianceTerm = 2 * totalSum;
totalMSEP = sqrt(sum(ReservesTable.MSEP(1:end-1) .^ 2) + covarianceTerm);

ReservesTable{'Total','MSEP'} = totalMSEP;
ReservesTable{'Total','MSEP Uncertainty'} = ReservesTable{'Total','MSEP'} / ReservesTable{'Total','Reserves'} * 100;
disp(ReservesTable(:,[1,2,3,8,9]));
             Latest Diagonal    Projected Ultimate Claims    Reserves      MSEP      MSEP Uncertainty
             _______________    _________________________    ________    ________    ________________

    2010         5089.4                  5089.4                    0            0             NaN    
    2011         5179.9                  5185.1               5.1857     0.010274         0.19812    
    2012         5625.4                  5642.3                16.89     0.014963        0.088593    
    2013         5803.7                  5838.6               34.886     0.018471        0.052945    
    2014         5878.7                  5936.3               57.583         3.14           5.453    
    2015         5772.8                    5861               88.148        6.474          7.3445    
    2016         5714.3                  5863.6               149.34       12.678          8.4897    
    2017         5854.4                  6157.7               303.29       24.383          8.0394    
    2018         5495.1                  6105.1               609.99       39.083          6.4071    
    2019         4945.9                  6465.2               1519.3       82.903          5.4568    
    Total           NaN                     NaN               2784.6       100.45          3.6074    

References

  1. Wüthrich, Mario, and Michael Merz. Stochastic Claims Reserving Methods in Insurance. Hoboken, NJ: Wiley, 2008.

  2. Friedland, Jacqueline. "Estimating Unpaid Claims Using Basic Techniques." Arlington, VA: Casualty Actuarial Society, 2010.

See Also

| | | | | | | | | | | |

Related Topics