What involves multiplying the company's recent annual average payments by a factor, typically based on industry sources and judgment?

Question

Options

• Aseasonal share approach
• Badvance analysis approach
• Csurvival ratio approach
• Dsocial inflation approach

• A
  5% (3)
• B
  3% (2)
• C
  78% (45)
• D
  14% (8)

Explanation

Survival ratio approach is correct because it is specifically defined as a method that estimates reserve needs by multiplying a company's recent annual average payments by a factor - the "survival ratio" - which represents how long current reserves would sustain ongoing payments. This factor is typically sourced from industry benchmarks and actuarial judgment, making it a blend of data and professional discretion.

Seasonal share approach (A) is wrong because it deals with allocating premiums or losses across time periods based on seasonal patterns, not multiplying payments by a reserve-adequacy factor.

Advance analysis approach (B) is not a recognized standard reserving methodology in this context - it's a distractor with no specific definition tied to this calculation structure.

Social inflation approach (D) refers to the phenomenon of rising claim costs driven by legal and societal trends (e.g., nuclear verdicts), not a computational method for multiplying payments by a factor.

Memory tip: Think of "survival" literally - the survival ratio asks, "How long would our reserves survive at the current payment rate?" Multiplying average payments by that survival factor gives you the reserve target. If reserves equal one year of payments, the survival ratio is 1; industry sources tell you what ratio your company should have.

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