Claim reserve prediction using the credibility theory for the Chain Ladder method

Abstract

A claim reserve is a reserve that must be prepared by a long-tail business insurance company to fulfil its obligations to future policyholders. One of the most popular methods for predicting claim reserves is the Chain Ladder method. However, on the Chain Ladder method, the claim reserve is predicted solely based on individual information (information derived from the company’s past experienced). If the individual information is not enough, an actuary needs to consider other information that is collective information (market experience). Both information can be combined by applying Bühlmann-Straub credibility theory. This paper will discuss about implementation of credibility theory for the Chain Ladder method to predict claim reserve for the data of private passenger autoliability/medical insurance in 1998-2007 are published by National Association of Insurance Commissioners (NAIC).