A new directive from the Treasury gives management the discretion to choose a best estimate for their IBNR (estimate of Incurred But Not yet Reported claims reserve) from a range of reasonable values.
Broadly speaking, five different methods are prescribed:
- Standard Chain Ladder
- Naive Loss Ratio
- Cape Cod
- Munich Chain
The definitions of these, and spreadsheets to be used, are provided to companies by the Treasury via the SGS electronic system. There has been a lot of debate in the industry as to which should beused. In fact one-size cannot fit all, due to differences in claims profiles between branches and between companies within branches.
Management can choose, during Q3 and Q4 which method suits their data best; this choice can be made per branch, but watch out - once made you have to stick to your choice for 3 years!
Some advice on choosing the best estimate method