Comparison of the claims reserves methods by analyzing the run-off error

The variability of claim costs represents an important risk component, which should be taken into account while implementing the internal models for solvency evaluation of an insurance undertaking. This component can generate differences between future payments for claims and the provisions set aside for the same claims (run-off error). If the liability concerning the claims reserve is evaluated using synthetic methods, then the run-off error depends on the statistical method adopted; when it is not possible to study analytically the properties of the estimators, methods based on stochastic simulation are particularly effective. This work focuses on measuring the run-off error with reference to claims reserves evaluation methods applied to simulated run-off matrices for the claims settlement development. The results from the numerical implementations provide the authors with useful insights for a rational selection of the statistical-actuarial method for the claims reserve evaluation on an integrated risk management framework. The setting of the analysis is similar to that adopted in other studies (Stanard, 1986; Pentikainen and Rantala, 1992; Buhlmann et al., 1980), however, it differs for estimation and simulation methods considered and for the statistics elaborated in the comparison. Keywords: run-off error, outstanding claims reserves, stochastic simulatio