Appreciate if you could mention me the mistakes and errors of the FS method
Frequency / Severity method
To find the frequency of claims,
The chain ladder based on cumulative count reported and cumulative count closed is used.
Calculate the cumulative count reported and cumulative count closed in each development quarter based on the link ratio.
Calculate the link ratios as the ratios of cumulative count reported over successive development quarters
Estimate the ultimate cumulative claims incurred by multiplying together
cumulative claims reported in the last payment quarter
product of the selected link ratios over the projected development quarter
To find the severity of claims,
The chain ladder based on reported per claim reported and payment per claim closed is used. These values are subject to the same distortions due to the changes in the claims handling process.
The implied open claims amount as at the latest accident quarter is taken.
If the severity of claims were determined using the chain ladder based on reported per claim reported and payment per claim closed approach, then the ultimate loss per claim is calculated as the product of frequency and severity of claim is the ultimate loss per claim. By dividing the ultimate loss per claim over the net Earned Premium, this will give us the loss ratios that we used in determining the ultimate loss.
If the severity of claims were determined as the implied open claims amount as at the latest accident quarter, then the ultimate loss is calculated as the number of open claims multiplied by the average claims size, plus the paid amount to date.
Frequency / Severity method
To find the frequency of claims,
The chain ladder based on cumulative count reported and cumulative count closed is used.
Calculate the cumulative count reported and cumulative count closed in each development quarter based on the link ratio.
Calculate the link ratios as the ratios of cumulative count reported over successive development quarters
Estimate the ultimate cumulative claims incurred by multiplying together
cumulative claims reported in the last payment quarter
product of the selected link ratios over the projected development quarter
To find the severity of claims,
The chain ladder based on reported per claim reported and payment per claim closed is used. These values are subject to the same distortions due to the changes in the claims handling process.
The implied open claims amount as at the latest accident quarter is taken.
If the severity of claims were determined using the chain ladder based on reported per claim reported and payment per claim closed approach, then the ultimate loss per claim is calculated as the product of frequency and severity of claim is the ultimate loss per claim. By dividing the ultimate loss per claim over the net Earned Premium, this will give us the loss ratios that we used in determining the ultimate loss.
If the severity of claims were determined as the implied open claims amount as at the latest accident quarter, then the ultimate loss is calculated as the number of open claims multiplied by the average claims size, plus the paid amount to date.
Frequency / Severity method
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