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DFA Insurance Company Case Study, Part I: - page 17 / 40

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Year 1

Year 2

Year 3

Year 4

Year 5

Standard Deviation

Workers Comp

85%

81%

77%

77%

77%

18%

Auto Liab

92%

85%

81%

79%

79%

12%

Home/CMP-Prop

78%

75%

75%

75%

75%

8%

All Other

68%

65%

64%

64%

64%

8%

GL/CMP-Liab

66%

61%

59%

58%

59%

11%

Table 4: Accident Year Loss Ratios by Line of Business is

The above statistics do not include the

effects of catastrophes

The timing of loss payments is as important as their magnitude. Payment patterns were estimated using DFAIC Schedule P loss triangles and industry results. We derived two sets of payment patterns that were separately applied to existing reserves and new business for each of the five lines of business. The consolidated reserve run-off pattern and accident year payment pattern for DFAIC are shown in Exhibits 1 and 2.

~5The standard deviations actually increase with time due to the diffusion process used to model loss ratios. Intuitively, one would expect volatility of projf~ctionsto increase with the time hodzon,

75

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