- Do the outliers have much in common with each other? Are they smaller companies or larger ones?
- The study works from net data. Would you get the same results gross of reinsurance? Schedule P triangles are net of reinsurance, of course, but you can construct a gross triangle from successive annual statements. Net triangles could be skewed by the presence of reinsurance, especially excessive of loss or catastrophe cover.
- Does the data set include reinsurers? Reinsurers don’t always receive – and rarely record – losses by accident year. Usually everything is recorded on an underwriting year. So the accident year loss payments and ultimates in Schedule P homeowners are estimates arrived at by allocating underwriting results across accident years. And, believe me, the allocation can be shot full of holes.
- Do other lines of business exhibit the same phenomena? Homeowners is short-tailed, but the presence of catastrophes skews development and results. Would you see the same phenomenon in, say, private passenger auto?
GC’s Jessica Leong generously responded in comments, and I wanted to highlight them, so:
Thanks for blogging about my article. You ask some interesting questions – here are my comments:
– Testing gross data: We have significantly less statement years to test the gross data, and all of it would have been during the last reserve deterioration cycle from around AY 1998 to 2002. That is, you would see almost all of the resulting ‘actual’ reserves end up being much higher than initially expected. Not a great test.
– The data does include reinsurers. So yes, the data is probably muddied by the need for these reinsurers to allocate from underwriting year to accident year. Schedule P data is far from perfect, and a significant portion of the time spent on this testing was spent on cleaning the data. Anyhow, it’s all that we’ve got.
– We saw these results in almost all of the lines that we tested, from workers compensation to other liability. Private passenger auto is a special case – most of the time we find that this line is over-reserved.