-29-
business and claim trends to satisfy himself that petitioner’s
underlying loss and loss adjustment expense patterns were stable
and consistent.21
Like Hayne, Streff used two accepted actuarial methods,
involving projections of both incurred and paid losses. Streff
computed his development factors22 for both incurred losses and
paid losses using petitioner’s last five to seven annual
statements. Streff expressed the development as a ratio or
arithmetic percentage showing the change in paid, or incurred,
losses from one year to the next. Streff computed a weighted
3-year average and a weighted average for all years presented,
and then selected the development factor to be applied to each
interval on the basis of his judgment and experience as an
actuary.
Streff applied the development factor determined for each
year to the paid or incurred losses for that year, as
21 James P. Streff (Streff) reviewed the following types of
information: (1) Financial considerations, such as written
premium, surplus, etc.; (2) marketing and loss exposure
considerations, such as the size of insured law firms, policy
limits, rate changes, and reinsurance; (3) loss reserve
considerations, such as reserve tests; (4) underlying loss
patterns, such as claim closure rate, claims closed without
payment, loss frequency and severity, and claim migration (i.e.,
movement of a claim from one reinsurance layer to another as a
result of deviations in its original estimation).
22 In general, development factors express the ratios of
amounts at one age to those at the immediately prior age.
Actuaries use development factors, along with other methods, to
estimate loss and loss expense reserves.
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