An incremental loss ratio method using prior information on calendar year effects (Q6173882)

In the context of IBNR, the author considers run-off triangles where incremental claims are grouped according to their accident and development year. In such models, external factors can have a similar influence on all incremental losses of the same calendar year. This can distort the triangle such that reserving methods like chain ladder or the loss ratio method do not work properly. A very recent example is the Covid-19 pandemic. In many countries, the insurance industry is in the process of establishing market knowledge about the impact of the pandemic on premiums and losses. The author extends the additive claims reserving model to allow for calendar year effects and develops a variant of the incremental loss ratio method (also known as the additive method) that can make use of such market knowledge. Formulas are derived for the mean squared error of prediction and a detailed numerical example is provided.