Large Loss and Shock Loss Development
Techniques for handling large and shock losses in actuarial reserving and pricing analyses.
Identifying Large Losses
Large losses can distort standard actuarial analyses if not handled properly. Common identification methods include setting dollar thresholds (often the 95th or 99th percentile of individual claims), using statistical tests for outliers, or applying industry benchmarks. The threshold should balance including enough data for credibility against excluding claims that would skew development patterns. Different lines of business require different large loss definitions.
Treatment Methods
Actuaries use several approaches for large losses. Truncation caps individual claims at a threshold and adds a separate load for excess amounts. Separate development analyzes large and small claims independently, then combines results. Frequency-severity models estimate the number and size of large claims separately using distributions like Pareto or lognormal. Shock losses from catastrophes or one-time events may be excluded from trend analysis entirely and priced through catastrophe loads or reinsurance cost allocations.