In the 2-year reserve development to PHS equation, the divisor is what?

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Multiple Choice

In the 2-year reserve development to PHS equation, the divisor is what?

The divisor is the PHS from two years ago. In a two-year reserve development to PHS calculation, you’re normalizing the observed development over a two-year window by the exposure base that existed two years back. Using the current year’s PHS or the PHS from just the prior year would either mix in development from the period itself or use an exposure base not aligned with the two-year window, biasing the result. So the correct divisor is the 2nd prior PHS.

The divisor is the PHS from two years ago. In a two-year reserve development to PHS calculation, you’re normalizing the observed development over a two-year window by the exposure base that existed two years back. Using the current year’s PHS or the PHS from just the prior year would either mix in development from the period itself or use an exposure base not aligned with the two-year window, biasing the result. So the correct divisor is the 2nd prior PHS.

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