Claims Reserving Manual, vol.2: Section D1: The chain ladder technique - a stochastic model

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The chain ladder technique (equivalently, age-to-age development factors) is one of the oldest actuarial techniques to be applied widely for estimating loss reserves.

The technique appears intuitively natural and only until more recently was always regarded as being based on a non-stochastic model: that is, a model which is deterministic and accordingly does not include a random component.

The principal objective of this article is to demonstrate the intimate connection between the chain ladder technique and a two-way analysis of variance model applied to the logarithms of the incremental paid losses. Recognition of this connection reveals the merits and defects of the chain ladder technique more clearly.