Keywords
loss distributions, loss reserves, generalized beta distribution, liability insurance
Abstract
Although an extensive literature has developed on modeling the loss reserve runoff triangle, the estimation of severity distributions applicable to claims settled in specific cells of the runoff triangle has received little attention in the literature. This paper proposes the use of a very flexible probability density function, the generalized beta of the 2nd kind (GB2) to model severity distributions in the cells of the runoff triangle and illustrates the use of the GB2 based on a sample of nearly 500,000 products liability paid claims. The results show that the GB2 provides a significantly better fit to the severity data than conventional distributions such as the Weibull, Burr 12, and generalized gamma and that modeling severity by cell is important to avoid errors in estimating the riskiness of liability claims payments, especially at the longer lags.
Original Publication Citation
Risky Loss Distributions and Modelling the Loss Reserve Pay-out Tail, with J. David Cummins and James B. McDonald, Review of Applied Economics, Vol. 3, No. 1, 2007.
BYU ScholarsArchive Citation
Cummins, J. David; McDonald, James B.; and Merrill, Craig B., "Risky Loss Distributions And Modeling the Loss Reserve Pay-out Tail" (2004). Faculty Publications. 9126.
https://scholarsarchive.byu.edu/facpub/9126
Document Type
Peer-Reviewed Article
Publication Date
2004
Publisher
Review of Applied Economics
Language
English
College
Marriott School of Business
Department
Finance
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