ABSTRACT

We now get into the heart of the frequency/severity model. We first turn our attention to frequency modelling. Because producing a frequency model means calculating the characteristics of the frequency distribution such as its mean and its variance, we need to know the ultimate claim count for each year. However, the only information we have is the number of claims reported in any particular year. To go from the reported claim count to the ultimate claim count, we need to estimate the number of incurred but not (yet) reported (IBNR) claims. The objective of this section is to illustrate how this can be done. Figure 13.1 shows how IBNR adjustment fits in the risk costing process – this will help us not to lose track of the overall scheme of things.