Spring 2015 Q21 b)
In sample answer 1, why do we adjust the 24 months expected severity? Shouldn't it be the 36 months expected severity because you multiply the incremental expected claim count to the incremental paid severity and the data is as of 2014 so we are missing the 36 month dev age unpaid amount for AY 2013?
Comments
You cannot adjust the 2013 severity at 36 months because it doesn't exist (and is not used anywhere in the problem.)
All sample answer 1 is saying is to adjust your severity estimate for 2013 (and therefore your estimate of ultimate for 2013) and then exclude AY 2013 from the rest of the calculations because the one-time change in AY 2013 would distort your estimates for the other years.
I think sample answer 2 is the better answer because there are actually old exam problems where you had to make a very similar adjustment. I think the examiners wanted to test whether you knew how to make that adjustment but didn't want to make you go through all the calculations. Having said that, they probably could have stated the question a little more clearly.