Question reads:
Given the following info, show that if there is a sudden, unexpected shift in the reporting pattern, the cost of a 2010 mature claims-made policy will be affected relatively little, if at all, relative to a 2010 occurrence policy.
> Losses of $1,500 reported in 2010 were produced in equal proportions from occurrences in 2006 - 2010.
> Losses are forecast to increase at a rate of 10% per year.
> Assume that 5% of claims are reported one year later than expected for each year, but the maximum report lag is still 4 years.
I thought I had a good understanding of claims-made policies until I got to this question. I guess I'm getting confused as to why an occurrence policy is trending losses if the losses occurred in the past.
I think I understand the claims-made portion of the answer. $1,500 is being paid in 2010, and it really doesn't matter when the claims occurred, $1,500 is $1,500.
What I don't understand is why the report lag matters for an occurrence policy. If a $300 loss happened in 2006, does it matter than it wasn't reported until 2011? Why are we now paying $300 + loss trend if the reported loss amount was still only $300?
Given the following info, show that if there is a sudden, unexpected shift in the reporting pattern, the cost of a 2010 mature claims-made policy will be affected relatively little, if at all, relative to a 2010 occurrence policy.
> Losses of $1,500 reported in 2010 were produced in equal proportions from occurrences in 2006 - 2010.
> Losses are forecast to increase at a rate of 10% per year.
> Assume that 5% of claims are reported one year later than expected for each year, but the maximum report lag is still 4 years.
I thought I had a good understanding of claims-made policies until I got to this question. I guess I'm getting confused as to why an occurrence policy is trending losses if the losses occurred in the past.
I think I understand the claims-made portion of the answer. $1,500 is being paid in 2010, and it really doesn't matter when the claims occurred, $1,500 is $1,500.
What I don't understand is why the report lag matters for an occurrence policy. If a $300 loss happened in 2006, does it matter than it wasn't reported until 2011? Why are we now paying $300 + loss trend if the reported loss amount was still only $300?
2002 Exam 5 - Q43 revised - Claims-Made vs. Occurrence
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