Claims Reserving Manual, vol.2: Section D5: Regression models based on log-incremental payments

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The first article in Volume 2 of this Manual by B Zehnwirth has shown the close connection between the intuitive Chain Ladder technique and the more formal two way analysis of variance model based on the log-incremental payments.

Models initiated by this more formal definition of the basic chain ladder have recently started to gain acceptance in loss reserving work and a number of papers on the subject have now been published. These models differ from the traditional techniques by a more formal definition of both the model assumptions and the parameter estimation and testing. With the formal models statistical estimates of reserves, that is both mean estimates and the associated model standard errors, can be calculated. The basic chain ladder is deterministic and produces point estimates of reserves.

The purpose of this paper is to serve as a basic introduction to these methods for the practitioner. To facilitate this a PC spreadsheet package is used to show how run-off models of the log-incremental payments can be identified and fitted in practice using multiple regression.