Case Reserve Adequacy Interpolation Model

Case Reserve Adequacy at
valuation time *t* is a lognormal
random variable with µ = (*meanlog* at time *t*) and s = (*sdlog* at time t). Here* t* is the fraction:

*t* = (valuation time minus report date) /
(payment date minus report date)

=
Va

__ __

The user enters the *meanlog* for times 0%, 40%, 70%, and 90%
(the time 0 value is labeled “case reserve adequacy” in the model). The *meanlog* for time 1.0 is set at 0.0. For any other value of *t*, use linear interpolation to obtain
its *meanlog*. The modeler would also
input *sdlog*
s for times 0%, 40%, 70%,
and 90%. This would give us much more flexibility in controlling the variance
of the reserve adequacy factor.

On the simulator screen, user achieves all the parameters by setting 4 lognormal distributions marked at 0%, 40%, 70%, and 90% times.

We have attached a spreadsheet with illustrations of how the parameters for the Reserve Adequacy factor vary between 0 and 1. The purpose of the spreadsheet is to illustrate the behavior of the reserve adequacy factors over time under each method. The negative case reserve adequacy

Notice how the reserve
adequacy mean and standard deviations become quite large if the *meanlog*s are significantly larger than
0.