The Mean Square Error Of Chain Ladder Method Reserve Estimates

Reserves are the largest part of the liability of a insurance company. Therefore, it is essential to estimate the amount of reserve as well as its adequacy, given the historical information. Speaking of casualty insurance, chain-ladder is one of the most important and popular methods to estimate reserves. As we know, the results of chain-ladder reserves depends on the data observed. So it is very helpful to estimate standard error of chain-ladder reserves as a measure of the uncertainty of reserves.In this paper, we take inflation rate into account when estimating the standard error of chain-ladder reserves. Unlike already existing studies, which exclude inflation rate and any other external influence, we separately consider fixed and random inflation rate and compare the difference between those two conditions. At the end of this paper, we conduct a numerical example to illustrate the distinctive results of reserve results come out from either consider or not consider inflation rate.