Best Estimates for Reserves

Link ratio techniques can be regarded as weighted regressions. We extend these regression models to handle different exposure bases and modeling of trends in the incremental data, and we develop a variety of diagnostic tools for testing the assumptions of these models. This “extended link ratio family” (ELRF) of regression models is used to test the assumptions made by standard link ratio techniques, and compare their predictive power with modeling trends in the incremental data. Most loss arrays don’t satisfy the assumptions of standard link ratio techniques. The ELRF modeling structure creates a bridge to a statistical modeling framework where the assumptions are more consistent with actual data. There is a paradigm shift from standard link ratio techniques to the statistical modeling framework—the ELRF models form a bridge from the “old” paradigm to the “new.” There are three critical stages involved in arriving at a reserve figure: extracting information from the data