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Claim Reserving via Inverse Probability Weighting: A Micro-Level Chain-Ladder Method

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Listed:
  • Sebastian Calcetero-Vanegas
  • Andrei L. Badescu
  • X. Sheldon Lin

Abstract

Claim reserving is primarily accomplished using macro-level models, with the Chain-Ladder method being the most widely adopted method. These methods are usually constructed heuristically and rely on oversimplified data assumptions, neglecting the heterogeneity of policyholders, and frequently leading to modest reserve predictions. In contrast, micro-level reserving leverages on stochastic modeling with granular information for improved predictions, but usually comes at the cost of more complex models that are unattractive to practitioners. In this paper, we introduce a simple macro-level type approach that can incorporate granular information from the individual level. To do so, we imply a novel framework in which we view the claim reserving problem as a population sampling problem and propose a reserve estimator based on inverse probability weighting techniques, with weights driven by policyholders' attributes. The framework provides a statistically sound method for aggregate claim reserving in a frequency and severity distribution-free fashion, while also incorporating the capability to utilize granular information via a regression-type framework. The resulting reserve estimator has the attractiveness of resembling the Chain-Ladder claim development principle, but applied at the individual claim level, so it is easy to interpret and more appealing to practitioners.

Suggested Citation

  • Sebastian Calcetero-Vanegas & Andrei L. Badescu & X. Sheldon Lin, 2023. "Claim Reserving via Inverse Probability Weighting: A Micro-Level Chain-Ladder Method," Papers 2307.10808, arXiv.org, revised Jul 2023.
    • Handle: RePEc:arx:papers:2307.10808
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    References listed on IDEAS

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