The implied pattern for cash flows from nominal reserves is based on which ratio?

• A. The ratio of paid losses to ultimate losses by accident year
• B. The ratio of incurred losses to ultimate losses by accident year
• C. The ratio of paid losses to ultimate losses by policy year
• D. The ratio of claims filed to claims paid

Answer: (A)

The pattern used to project cash flows for nominal reserves relies on how much of the final (ultimate) losses have already been paid, broken out by accident year. By analyzing the paid-to-ultimate ratio for each accident year, you can see the development of payments over time and estimate how much remains to be paid in the future. This is the most straightforward way to translate observed cash outflows into a forecast of future cash needs, since actual payments drive reserve requirements and accident-year grouping aligns with when losses occur and their settlement patterns unfold. Using incurred-to-ultimate would mix in reserves for reporting lags and not strictly reflect cash disbursement progress. Grouping by policy year would blur the development pattern across years, making the cash-flow pattern harder to interpret. Claims filed to claims paid ignores the time dimension and the ultimate size, so it doesn’t capture how reserves are expected to unwind over time.