[[Actuarial Notes Wiki|Wiki]] / [[Exam 5 (CAS)]] / **Berquist-Sherman Method** ## Definition ==Berquist-Sherman Method== is an adjustment technique that modifies development triangles to account for changes in case reserve adequacy levels over time, removing the distortion caused by systematic shifts in case reserving practices. ## Purpose Addresses the problem when case reserve adequacy has changed: - More conservative now than in past - Less adequate now than in past - Systematic change distorts development patterns ## Methodology ### Step 1: Quantify Case Adequacy Change ``` Analyze historical case development to measure: - How much cases are developing beyond initial reserves - Whether this pattern is changing over time - Magnitude of inadequacy/redundancy ``` ### Step 2: Adjust Historical Data ``` Adjust prior year losses to "as-if" current adequacy: Adjusted Loss = Historical Loss × Adequacy Adjustment Factor Example: If current cases 10% more adequate than 2 years ago: Adjust 2-year-old data upward by 10% ``` ### Step 3: Develop Adjusted Triangle ``` Use standard methods on adjusted triangle: - Apply chain ladder to adjusted data - Calculate adjusted LDFs - Project ultimate from adjusted current losses ``` ### Step 4: Project Ultimate ``` Ultimate = Current Reported × Adjusted LDF ``` ## Example ``` Situation: Case reserves have become 15% more adequate over 3 years Original Triangle: AY 12mo 24mo 36mo 2021 1,000 1,400 1,540 2022 1,050 1,470 2023 1,100 Case adequacy analysis shows: 2021 cases were 15% low 2022 cases were 7% low 2023 cases are adequate Adjusted Triangle (as-if current adequacy): AY 12mo 24mo 36mo 2021 1,150 1,610 1,771 2022 1,124 1,573 2023 1,100 Now development factors reflect current adequacy: 12-24: 1.400 (vs 1.400 original) 24-36: 1.100 (vs 1.100 original) Patterns now consistent ``` ## When to Use **Appropriate when:** - Known changes in case reserve philosophy - New claims system affecting reserves - Systematic change in reserve adequacy - Development patterns appear inconsistent **Signs you may need B-S:** - Decreasing development factors over time - Known case reserve strengthening - Claims department policy changes - Acquisition/system changes ## Advantages - Removes distortion from case changes - Produces more reliable LDFs - Reflects current reserve adequacy - Better ultimate estimates ## Disadvantages - Complex to implement - Requires judgment on adequacy changes - Needs detailed historical case data - May be difficult to quantify adjustment ## Related Concepts - [[Case Reserves#Definition]] - [[Chain Ladder Method#Definition]] - [[Case Adequacy#Definition]] ## References - Friedland, Chapter 7