# Brosius

 Qualities of Link Ratio Method 1. L(x) = c * x, where c is a "selected link ratio"2. The value of c is chosen after a review of observed link ratios from previous years3. The link ratio method fits a line through the origin4. Optimal method when reported losses are greater than expected and Cov(x,y) > Var(x) Qualities of Budgeted Loss Method 1. L(x) = k2. Used if the fluctuation is extreme, or if past data is not available3. The value of k could be based on variety of data: past loss amounts, earned premium * expected loss ratio, etc.4. The Budgeted Loss Method fits a horizontal line5. Also known as "Pegged Loss Method"6. x and y are totally uncorrelated, i.e., Once k is chosen, y is estimated as k, no matter what x happens to be7. Optimal method when reported losses are greater than expected and Cov(x,y) < Var(x) Qualities of Least Squares Method Credibility Form of Least Squares Method L(x) = Z * LRE + (1 - Z) * BLE, where1. LRE = Link Ratio Estimate2. BLE = Budgeted Loss Estimate3. Z = b/c4. c = y/x 2 Adjustments to Losses Before Using Least Squares Development 1. Correction for inflation2. Divide by exposures Sampling Errors and Recommended Solutions with Least Squares Method 1. a < 0 implies that the estimate of y will be negative for small values of x. Use link ratio method instead.2. b < 0 implies that the estimate of y gets smaller as x increases. Use budgeted loss method instead. 2 Situations Where Least Squares Method Can Be Helpful for Developing Losses 1. When developing losses for small states2. When developing losses for lines that are subject to serious fluctuations Advantages of Using Best Linear Approximation of Bayesian Estimate In comparison to the actual Bayesian estimate, the best linear approximation is:1. Simpler to compute2. Easier to understand and explain3. Less dependent upon the underlying distributions Relationship of Cov(X,Y) and Var(X) 1. If Cov(X,Y) < Var(X), a large reported amount should lead to a decrease in the reserve2. If Cov(X,Y) = Var(X), a change in the reported amount should not aff ect the reserve3. If Cov(X,Y) > Var(X), a large reported amount should lead to an increase in the reserve Enterprise Risk Management De finition: Discipline by which an organization in any industry assesses, controls, exploits, fi nances, and monitors risks from all sources for the purposes of increasing the organization's short-and long-term value to its stakeholders AuthorEsaie ID26153 Card SetBrosius Description Updated2010-07-09T17:25:55Z Show Answers