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The Prediction Error of the Chain Ladder Method (With Application to Real Data)

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  • Afaf Antar Zohry
  • Mostafa Abdelghany Ahmed

Abstract

The chain ladder method is the most widely used method of estimating claims reserves due to its simplicity and ease of application. It is very important to know the accuracy of the resulting estimates. Murphy presented a recursive model to estimate the standard error of claims reserves estimates, in line with the solvency ii requirements as a new regulatory framework adjusted according to risk, which requires the necessity to estimate the error and uncertainty of the claims reserving estimates. In Murphy's model, the mean square error (MSE) is analyzed into its components- variance and bias. In this paper, the recursive model of Murphy was used to estimate the prediction error in claims reserves estimates of General Accident & Miscellaneous Insurance in one of the Egyptian insurance companies.

Suggested Citation

  • Afaf Antar Zohry & Mostafa Abdelghany Ahmed, 2021. "The Prediction Error of the Chain Ladder Method (With Application to Real Data)," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(12), pages 1-14, December.
    • Handle: RePEc:ibn:ijefaa:v:12:y:2021:i:12:p:14
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    References listed on IDEAS

    as
    1. Mario V. Wuthrich & Michael Merz, 2015. "Stochastic Claims Reserving Manual: Advances in Dynamic Modeling," Swiss Finance Institute Research Paper Series 15-34, Swiss Finance Institute.
    2. Paulo J. R. Pinheiro & João Manuel Andrade e Silva & Maria De Lourdes Centeno, 2003. "Bootstrap Methodology in Claim Reserving," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(4), pages 701-714, December.
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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