# Brosius

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 Author: Esaie ID: 26153 Filename: Brosius Updated: 2010-07-09 13:25:55 Tags: Exam6 Folders: Description: Show Answers:

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1. 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 years
• 3. The link ratio method fits a line through the origin
• 4. Optimal method when reported losses are greater than expected and Cov(x,y) > Var(x)
2. Qualities of Budgeted Loss Method
• 1. L(x) = k
• 2. Used if the fluctuation is extreme, or if past data is not available
• 3. 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 line
• 5. 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 be
• 7. Optimal method when reported losses are greater than expected and Cov(x,y) < Var(x)
3. Qualities of Least Squares Method
4. Credibility Form of Least Squares Method
• L(x) = Z * LRE + (1 - Z) * BLE, where
• 1. LRE = Link Ratio Estimate
• 2. BLE = Budgeted Loss Estimate
• 3. Z = b/c
• 4. c = y/x
5. 2 Adjustments to Losses Before Using Least Squares Development
• 1. Correction for inflation
• 2. Divide by exposures
6. 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.
7. 2 Situations Where Least Squares Method Can Be Helpful for Developing Losses
• 1. When developing losses for small states
• 2. When developing losses for lines that are subject to serious fluctuations
8. Advantages of Using Best Linear Approximation of Bayesian Estimate
• In comparison to the actual Bayesian estimate, the best linear approximation is:
• 1. Simpler to compute
• 2. Easier to understand and explain
• 3. Less dependent upon the underlying distributions
9. 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 reserve
• 2. If Cov(X,Y) = Var(X), a change in the reported amount should not aff ect the reserve
• 3. If Cov(X,Y) > Var(X), a large reported amount should lead to an increase in the reserve
10. 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

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