8.5 Issues with Assumptions

Three assumptions that are likely reasonable

1. Must select a basic limit \(B\)

2. Needs an ultimate claim size model

   • Or use ILFs

   • Just have to accurate around the basic limit and policy limit since that’s where we calculate expectations

3. Need to create a triangle of losses at basic limit and one cost level

   • We do this in the step converting the base triangle

Two assumptions that are more tenuous

1. Requires robust claim size model at each age

   • Ultimately we need the ratio of limited losses at different layers, less import to get the absolute values correct

2. Trend

   • Trend should be applied to the incremental losses

   • Not clear how to apply trend to reported losses (by day of reserve or payment?)