7.3 Method 2) Implied Development

Ultimate excess loss = ultimate unlimited loss - ultimate limited loss

• Need to make sure LDFs are consistent with the different layers (especially for the tail)

  • \(LDF^L \leq LDF\)

  • Don’t develop limited losses at a layer above limited losses at a higher layer

• Need to adjust the deductible at different exposure year for inflation when selecting limited LDFs

  • Keeps the proportion of deductible/XS losses consistent over time

  • Otherwise historical losses take too long to hit the deductible limit and distorts the LDF

Advantages

• Get estimate for early period with no losses

• Limited factors are more stable

Disadvantages

• Does not directly estimate the XS loss