Applying Stochastic Methods

Getting Started

This tutorial focuses on using stochastic methods to estimate ultimates.

# Black linter, optional
# import jupyter_black as jb
# jb.load()

import pandas as pd
import numpy as np
import chainladder as cl
import matplotlib.pyplot as plt
import statsmodels.api as sm

print("pandas: " + pd.__version__)
print("numpy: " + np.__version__)
print("chainladder: " + cl.__version__)

pandas: 3.0.3
numpy: 2.4.6
chainladder: 0.9.2

Disclaimer

Note that a lot of the examples shown might not be applicable in a real world scenario, and is only meant to demonstrate some of the functionalities included in the package. The user should always follow all applicable laws, the Code of Professional Conduct, applicable Actuarial Standards of Practice, and exercise their best actuarial judgement.

Intro to MackChainladder

Like the basic Chainladder method, the MackChainladder is entirely specified by its selected development pattern. In fact, it is the basic Chainladder, but with extra features.

clrd = (
    cl.load_sample("clrd")
    .groupby("LOB")
    .sum()
    .loc["wkcomp", ["CumPaidLoss", "EarnedPremNet"]]
)

cl.Chainladder().fit(clrd["CumPaidLoss"]).ultimate_ == cl.MackChainladder().fit(
    clrd["CumPaidLoss"]
).ultimate_

np.True_

Let’s create a Mack’s Chainladder model.

mack = cl.MackChainladder().fit(clrd["CumPaidLoss"])

MackChainladder has the following additional fitted features that the deterministic Chainladder does not:

• full_std_err_: The full standard error

• total_process_risk_: The total process error

• total_parameter_risk_: The total parameter error

• mack_std_err_: The total prediction error by origin period

• total_mack_std_err_: The total prediction error across all origin periods

Notice these are all measures of uncertainty, but where can they be applied? Let’s start by examining the link_ratios underlying the triangle between age 12 and 24.

clrd_first_lags = clrd[clrd.development <= 24][clrd.origin < "1997"]["CumPaidLoss"]
clrd_first_lags

	12	24
1988	285,804	638,532
1989	307,720	684,140
1990	320,124	757,479
1991	347,417	793,749
1992	342,982	781,402
1993	342,385	743,433
1994	351,060	750,392
1995	343,841	768,575
1996	381,484	736,040

A simple average link-ratio can be directly computed.

clrd_first_lags.link_ratio.to_frame().mean().iloc[0]

np.float64(2.2066789527531494)

We can also verify that the result is the same as the Development object.

cl.Development(average="simple").fit(clrd["CumPaidLoss"]).ldf_.to_frame(
    origin_as_datetime=False
).values[0, 0]

np.float64(2.2066789527531494)

The Linear Regression Framework

Mack noted that the estimate for the LDF is really just a linear regression fit. In the case of using the simple average, it is a weighted regression where the weight is \(\left (\frac{1}{X} \right )^{2}\).

Let’s take a look at the fitted coefficient and verify that this ties to the direct calculations that we made earlier. With the regression framework in hand, we can get more information about our LDF estimate than just the coefficient.

y = clrd_first_lags.to_frame(origin_as_datetime=True).values[:, 1]
x = clrd_first_lags.to_frame(origin_as_datetime=True).values[:, 0]

model = sm.WLS(y, x, weights=(1 / x) ** 2)
results = model.fit()
results.summary()

WLS Regression Results

Dep. Variable:	y	R-squared (uncentered):	0.997
Model:	WLS	Adj. R-squared (uncentered):	0.997
Method:	Least Squares	F-statistic:	2887.
Date:	Wed, 24 Jun 2026	Prob (F-statistic):	1.60e-11
Time:	22:10:05	Log-Likelihood:	-107.89
No. Observations:	9	AIC:	217.8
Df Residuals:	8	BIC:	218.0
Df Model:	1
Covariance Type:	nonrobust

	coef	std err	t	P>|t|	[0.025	0.975]
x1	2.2067	0.041	53.735	0.000	2.112	2.301

Omnibus:	7.448	Durbin-Watson:	1.177
Prob(Omnibus):	0.024	Jarque-Bera (JB):	2.533
Skew:	-1.187	Prob(JB):	0.282
Kurtosis:	4.058	Cond. No.	1.00

Notes:
[1] R² is computed without centering (uncentered) since the model does not contain a constant.
[2] Standard Errors assume that the covariance matrix of the errors is correctly specified.

By toggling the weights of our regression, we can handle the most common types of averaging used in picking loss development factors.

• For simple average, the weights are \(\left (\frac{1}{X} \right )^{2}\)

• For volume-weighted average, the weights are \(\left (\frac{1}{X} \right )\)

• For “regression” average, the weights are 1

print("Simple average:")
print(
    round(
        cl.Development(average="simple")
        .fit(clrd_first_lags)
        .ldf_.to_frame(origin_as_datetime=False)
        .values[0, 0],
        10,
    )
    == round(sm.WLS(y, x, weights=(1 / x) ** 2).fit().params[0], 10)
)

print("Volume-weighted average:")
print(
    round(
        cl.Development(average="volume")
        .fit(clrd_first_lags)
        .ldf_.to_frame(origin_as_datetime=False)
        .values[0, 0],
        10,
    )
    == round(sm.WLS(y, x, weights=(1 / x)).fit().params[0], 10)
)

print("Regression average:")
print(
    round(
        cl.Development(average="regression")
        .fit(clrd_first_lags)
        .ldf_.to_frame(origin_as_datetime=False)
        .values[0, 0],
        10,
    )
    == round(sm.OLS(y, x).fit().params[0], 10)
)

Simple average:
True
Volume-weighted average:
True
Regression average:
True

The regression framework is what the Development estimator uses to set development patterns. Although we discard the information in the deterministic methods, in the stochastic methods, Development has two useful statistics for estimating reserve variability, both of which come from the regression framework. The stastics are sigma_ and std_err_ , and they are used by the MackChainladder estimator to determine the prediction error of our reserves.

dev = cl.Development(average="simple").fit(clrd["CumPaidLoss"])

dev.sigma_

	12-24	24-36	36-48	48-60	60-72	72-84	84-96	96-108	108-120
(All)	0.1232	0.0340	0.0135	0.0091	0.0074	0.0067	0.0073	0.0097	0.0032

dev.std_err_

	12-24	24-36	36-48	48-60	60-72	72-84	84-96	96-108	108-120
(All)	0.0411	0.0120	0.0051	0.0037	0.0033	0.0033	0.0042	0.0068	0.0032

Remember that std_err_ is calculated as \(\frac{\sigma}{\sqrt{N}}\).

np.round(
    dev.sigma_.to_frame(origin_as_datetime=False).transpose()["(All)"].values
    / np.sqrt(
        clrd["CumPaidLoss"].age_to_age.to_frame(origin_as_datetime=False).count()
    ).values,
    4,
)

array([0.0411, 0.012 , 0.0051, 0.0037, 0.0033, 0.0033, 0.0042, 0.0068,
       0.0032])

Since the regression framework uses the weighting method, we can easily turn “on and off” any observation we want using the dropping capabilities such as drop_valuation in the Development estimator. Dropping link ratios not only affects the ldf_ and cdf_, but also the std_err_ and sigma of the estimates.

Can we eliminate the 1988 valuation from our triangle, which is identical to eliminating the first observation from our 12-24 regression fit? Let’s calculate the std_err for the ldf_ of ages 12-24, and compare it to the value calculated using the weighted least squares regression.

clrd["CumPaidLoss"]

	12	24	36	48	60	72	84	96	108	120
1988	285,804	638,532	865,100	996,363	1,084,351	1,133,188	1,169,749	1,196,917	1,229,203	1,241,715
1989	307,720	684,140	916,996	1,065,674	1,154,072	1,210,479	1,249,886	1,291,512	1,308,706
1990	320,124	757,479	1,017,144	1,169,014	1,258,975	1,315,368	1,368,374	1,394,675
1991	347,417	793,749	1,053,414	1,209,556	1,307,164	1,381,645	1,414,747
1992	342,982	781,402	1,014,982	1,172,915	1,281,864	1,328,801
1993	342,385	743,433	959,147	1,113,314	1,187,581
1994	351,060	750,392	993,751	1,114,842
1995	343,841	768,575	962,081
1996	381,484	736,040
1997	340,132

round(
    cl.Development(average="volume", drop_valuation="1988")
    .fit(clrd["CumPaidLoss"])
    .std_err_.to_frame(origin_as_datetime=False)
    .values[0, 0],
    8,
) == round(sm.WLS(y[1:], x[1:], weights=(1 / x[1:])).fit().bse[0], 8)

np.True_

With sigma_ and std_err_ in hand, Mack goes on to develop recursive formulas to estimate parameter_risk_ and process_risk_.

mack.parameter_risk_

	12	24	36	48	60	72	84	96	108	120	9999
1988	0	0	0	0	0	0	0	0	0	0	0
1989	0	0	0	0	0	0	0	0	0	4	4
1990	0	0	0	0	0	0	0	0	9,520	9,616	9,616
1991	0	0	0	0	0	0	0	5,984	11,629	11,747	11,747
1992	0	0	0	0	0	0	4,588	7,468	12,252	12,376	12,376
1993	0	0	0	0	0	4,037	5,981	8,187	12,259	12,384	12,384
1994	0	0	0	0	4,163	5,980	7,555	9,503	13,302	13,438	13,438
1995	0	0	0	4,921	6,736	8,137	9,446	11,118	14,502	14,649	14,649
1996	0	0	8,824	11,289	12,895	14,101	15,190	16,513	19,141	19,336	19,336
1997	0	14,499	21,075	24,749	27,093	28,657	29,907	31,164	33,103	33,440	33,440

mack.process_risk_

	12	24	36	48	60	72	84	96	108	120	9999
1988	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
1989	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	3.72	3.72
1990	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	11.40	12.15	12.15
1991	0.00	0.00	0.00	0.00	0.00	0.00	0.00	8.71	14.63	15.30	15.30
1992	0.00	0.00	0.00	0.00	0.00	0.00	7.96	11.84	16.64	17.25	17.25
1993	0.00	0.00	0.00	0.00	0.00	8.28	11.50	14.42	18.41	18.97	18.97
1994	0.00	0.00	0.00	0.00	9.66	13.11	15.59	18.04	21.51	22.06	22.06
1995	0.00	0.00	0.00	13.27	17.28	19.90	21.95	23.99	26.87	27.40	27.40
1996	0.00	0.00	29.09	36.00	40.10	42.79	44.84	46.72	48.93	49.58	49.58
1997	0.00	74.58	102.38	118.47	128.48	134.72	139.27	143.01	146.29	147.83	147.83

Assumption of Independence

The Mack model makes a lot of assumptions about independence (i.e. the covariance between random processes is 0). This means that many of the Variance estimates in the MackChainladder model follow the form of \(Var(A+B) = Var(A)+Var(B)\).

First, mack_std_err_² \(=\) parameter_risk_² \(+\) process_risk_², the parameter risk and process risk is assumed to be independent.

mack.parameter_risk_**2 + mack.process_risk_**2

	12	24	36	48	60	72	84	96	108	120	9999
1988
1989										29	29
1990									90,622,872	92,477,185	92,477,185
1991								35,806,255	135,235,171	138,002,323	138,002,323
1992							21,045,684	55,767,544	150,102,429	153,173,785	153,173,785
1993						16,294,082	35,768,727	67,024,596	150,277,824	153,352,766	153,352,766
1994					17,326,856	35,766,132	57,073,639	90,308,920	176,950,222	180,570,922	180,570,922
1995				24,214,697	45,371,037	66,217,721	89,219,298	123,616,047	210,301,239	214,604,352	214,604,352
1996			77,861,948	127,434,995	166,276,879	198,834,627	230,731,895	272,691,303	366,371,931	373,868,487	373,868,487
1997		210,235,570	444,183,929	612,506,466	734,069,280	821,246,548	894,468,239	971,219,052	1,095,822,851	1,118,245,081	1,118,245,081

mack.mack_std_err_**2

	12	24	36	48	60	72	84	96	108	120	9999
1988	0	0	0	0	0	0	0	0	0	0	0
1989	0	0	0	0	0	0	0	0	0	29	29
1990	0	0	0	0	0	0	0	0	90,622,872	92,477,185	92,477,185
1991	0	0	0	0	0	0	0	35,806,255	135,235,171	138,002,323	138,002,323
1992	0	0	0	0	0	0	21,045,684	55,767,544	150,102,429	153,173,785	153,173,785
1993	0	0	0	0	0	16,294,082	35,768,727	67,024,596	150,277,824	153,352,766	153,352,766
1994	0	0	0	0	17,326,856	35,766,132	57,073,639	90,308,920	176,950,222	180,570,922	180,570,922
1995	0	0	0	24,214,697	45,371,037	66,217,721	89,219,298	123,616,047	210,301,239	214,604,352	214,604,352
1996	0	0	77,861,948	127,434,995	166,276,879	198,834,627	230,731,895	272,691,303	366,371,931	373,868,487	373,868,487
1997	0	210,235,570	444,183,929	612,506,466	734,069,280	821,246,548	894,468,239	971,219,052	1,095,822,851	1,118,245,081	1,118,245,081

Second, total_process_risk_ ² \(= \sum_{origin} \) process_risk_ ², the process risk is assumed to be independent between origins.

mack.total_process_risk_**2

	12	24	36	48	60	72	84	96	108	120	9999
1988	0	5,563	11,328	15,508	18,507	20,616	22,327	23,960	25,939	26,602	26,602

(mack.process_risk_**2).sum(axis="origin")

	12	24	36	48	60	72	84	96	108	120	9999
1988		5,563	11,328	15,508	18,507	20,616	22,327	23,960	25,939	26,602	26,602

Lastly, independence is also assumed to apply to the overall standard error of reserves, as expected.

(mack.parameter_risk_**2 + mack.process_risk_**2).sum(axis=2).sum(axis=3)

np.float64(13766856369.20736)

(mack.mack_std_err_**2).sum(axis=2).sum(axis=3)

np.float64(13766856369.20736)

This over-reliance on independence is one of the weaknesses of the MackChainladder method. Nevertheless, if the data align with this assumption, then total_mack_std_err_ is a reasonable esimator of reserve variability.

Mack Reserve Variability

The mack_std_err_ at ultimate is the reserve variability for each origin period.

mack.mack_std_err_[
    mack.mack_std_err_.development == mack.mack_std_err_.development.max()
]

	9999
1988
1989	5
1990	9,617
1991	11,747
1992	12,376
1993	12,384
1994	13,438
1995	14,649
1996	19,336
1997	33,440

With the summary_ method, we can more easily look at the result of the MackChainladder model.

mack.summary_

	Latest	IBNR	Ultimate	Mack Std Err
1988	1,241,715		1,241,715
1989	1,308,706	13,321	1,322,027	5
1990	1,394,675	42,210	1,436,885	9,617
1991	1,414,747	79,409	1,494,156	11,747
1992	1,328,801	119,709	1,448,510	12,376
1993	1,187,581	167,192	1,354,773	12,384
1994	1,114,842	260,401	1,375,243	13,438
1995	962,081	402,403	1,364,484	14,649
1996	736,040	636,834	1,372,874	19,336
1997	340,132	1,056,335	1,396,467	33,440

Let’s visualize the paid to date, the estimated reserves, and their standard errors with a histogram.

plt.bar(
    mack.summary_.to_frame(origin_as_datetime=True).index.year,
    mack.summary_.to_frame(origin_as_datetime=True)["Latest"],
    label="Paid",
)
plt.bar(
    mack.summary_.to_frame(origin_as_datetime=True).index.year,
    mack.summary_.to_frame(origin_as_datetime=True)["IBNR"],
    bottom=mack.summary_.to_frame(origin_as_datetime=True)["Latest"],
    yerr=mack.summary_.to_frame(origin_as_datetime=True)["Mack Std Err"],
    label="Reserves",
)
plt.legend(loc="upper left")
plt.ylim(0, 1800000)

(0.0, 1800000.0)

We can also simulate the (assumed) normally distributed IBNR with np.random.normal().

ibnr_mean = mack.ibnr_.sum()
ibnr_sd = mack.total_mack_std_err_.values[0, 0]
n_trials = 10000

np.random.seed(2021)
dist = np.random.normal(ibnr_mean, ibnr_sd, size=n_trials)

plt.hist(dist, bins=50)

(array([  1.,   2.,   8.,   7.,  13.,  17.,  30.,  29.,  41.,  72.,  66.,
         94., 142., 185., 195., 274., 312., 351., 392., 419., 509., 491.,
        546., 540., 577., 537., 534., 524., 483., 448., 401., 348., 300.,
        268., 210., 163., 118.,  94.,  68.,  59.,  41.,  25.,  19.,  18.,
          7.,   5.,   3.,   5.,   5.,   4.]),
 array([2419463.05710306, 2434136.10852954, 2448809.15995603,
        2463482.21138252, 2478155.26280901, 2492828.3142355 ,
        2507501.36566199, 2522174.41708848, 2536847.46851497,
        2551520.51994146, 2566193.57136795, 2580866.62279443,
        2595539.67422092, 2610212.72564741, 2624885.7770739 ,
        2639558.82850039, 2654231.87992688, 2668904.93135337,
        2683577.98277986, 2698251.03420635, 2712924.08563284,
        2727597.13705932, 2742270.18848581, 2756943.2399123 ,
        2771616.29133879, 2786289.34276528, 2800962.39419177,
        2815635.44561826, 2830308.49704475, 2844981.54847124,
        2859654.59989773, 2874327.65132421, 2889000.7027507 ,
        2903673.75417719, 2918346.80560368, 2933019.85703017,
        2947692.90845666, 2962365.95988315, 2977039.01130964,
        2991712.06273613, 3006385.11416262, 3021058.1655891 ,
        3035731.21701559, 3050404.26844208, 3065077.31986857,
        3079750.37129506, 3094423.42272155, 3109096.47414804,
        3123769.52557453, 3138442.57700102, 3153115.62842751]),
 <BarContainer object of 50 artists>)

ODP Bootstrap Model

The MackChainladder focuses on a regression framework for determining the variability of reserve estimates. An alternative approach is to use the statistical bootstrapping, or sampling from a triangle with replacement to simulate new triangles.

Bootstrapping imposes less model constraints than the MackChainladder, which allows for greater applicability in different scenarios. Sampling new triangles can be accomplished through the BootstrapODPSample estimator. This estimator will take a single triangle and simulate new ones from it. To simulate new triangles randomly from an existing triangle, we specify n_sims with how many triangles we want to simulate, and access the resampled_triangles_ attribute to get the simulated triangles. Notice that the shape of resampled_triangles_ matches n_sims at the first index.

samples = (
    cl.BootstrapODPSample(n_sims=10000).fit(clrd["CumPaidLoss"]).resampled_triangles_
)
samples

/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/adjustments/bootstrap.py:311: UserWarning: 'where' used without 'out', expect unitialized memory in output. If this is intentional, use out=None.
  hat = xp.diagonal(xp.sqrt(xp.divide(1, abs(1 - hat), where=(1 - hat) != 0)))

	Triangle Summary
Valuation:	1997-12
Grain:	OYDY
Shape:	(10000, 1, 10, 10)
Index:	[LOB, Simulation_#]
Columns:	[CumPaidLoss]

Alternatively, we could use BootstrapODPSample to transform our triangle into a resampled set.

The notion of the ODP Bootstrap is that as our simulations approach infinity, we should expect our mean simulation to converge on the basic Chainladder estimate of of reserves.

Let’s apply the basic chainladder to our original triangle and also to our simulated triangles to see whether this holds true.

ibnr_cl = cl.Chainladder().fit(clrd["CumPaidLoss"]).ibnr_.sum()
ibnr_bootstrap = cl.Chainladder().fit(samples).ibnr_.sum("origin").mean()

print(
    "Chainladder's IBNR estimate:",
    ibnr_cl,
)
print(
    "BootstrapODPSample's mean IBNR estimate:",
    ibnr_bootstrap,
)
print("Difference $:", ibnr_cl - ibnr_bootstrap)
print("Difference %:", abs(ibnr_cl - ibnr_bootstrap) / ibnr_cl)

Chainladder's IBNR estimate: 2777812.6890986315
BootstrapODPSample's mean IBNR estimate: 2778644.866616378
Difference $: -832.1775177465752
Difference %: 0.00029958014124293144

/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:120: RuntimeWarning: overflow encountered in exp
  sigma_ = xp.exp(time_pd * reg.slope_ + reg.intercept_)
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:124: RuntimeWarning: overflow encountered in exp
  std_err_ = xp.exp(time_pd * reg.slope_ + reg.intercept_)
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:127: RuntimeWarning: invalid value encountered in multiply
  sigma_ = sigma_ * 0
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:128: RuntimeWarning: invalid value encountered in multiply
  std_err_ = std_err_* 0

Using Deterministic Methods with Bootstrapped Samples

Our samples is just another triangle object with all the functionality of a regular triangle. This means we can apply any functionality we want to our samples including any deterministic methods we learned about previously.

pipe = cl.Pipeline(
    steps=[("dev", cl.Development(average="simple")), ("tail", cl.TailConstant(1.05))]
)

pipe.fit(samples)

Pipeline(steps=[('dev', Development(average='simple')),
                ('tail', TailConstant(tail=1.05))])

In a Jupyter environment, please rerun this cell to show the HTML representation or trust the notebook.
On GitHub, the HTML representation is unable to render, please try loading this page with nbviewer.org.

Now instead of a single ldf_ (and cdf_) array across developmental ages, we have 10,000 arrays of ldf_ (and cdf_).

pipe.named_steps.dev.ldf_.iloc[0]

	12-24	24-36	36-48	48-60	60-72	72-84	84-96	96-108	108-120
(All)	2.1346	1.3106	1.1510	1.0866	1.0511	1.0309	1.0293	1.0215	1.0120

pipe.named_steps.dev.ldf_.iloc[1]

	12-24	24-36	36-48	48-60	60-72	72-84	84-96	96-108	108-120
(All)	2.2914	1.3230	1.1491	1.0820	1.0473	1.0400	1.0177	1.0275	1.0075

pipe.named_steps.dev.ldf_.iloc[9999]

	12-24	24-36	36-48	48-60	60-72	72-84	84-96	96-108	108-120
(All)	2.1693	1.3084	1.1477	1.0770	1.0410	1.0317	1.0290	1.0241	1.0103

This allows us to look at the varibility of any fitted property used. Let’s look at the distribution of the age-to-age factor between age 12 and 24, and compare it against the LDF calculated from the non-bootstrapped triangle.

resampled_ldf = pipe.named_steps.dev.ldf_
plt.hist(pipe.named_steps.dev.ldf_.values[:, 0, 0, 0], bins=50)

orig_dev = cl.Development(average="simple").fit(clrd["CumPaidLoss"])
plt.axvline(orig_dev.ldf_.values[0, 0, 0, 0], color="black", linestyle="dashed")

<matplotlib.lines.Line2D at 0x731a4f111d10>

Bootstrap vs Mack

We can approximate some of the Mack’s parameters calculated using the regression framework.

bootstrap_vs_mack = resampled_ldf.std("index").to_frame(origin_as_datetime=False).T
bootstrap_vs_mack.rename(columns={"(All)": "Std_Bootstrap"}, inplace=True)
bootstrap_vs_mack = bootstrap_vs_mack.merge(
    orig_dev.std_err_.to_frame(origin_as_datetime=False).T,
    left_index=True,
    right_index=True,
)
bootstrap_vs_mack.rename(columns={"(All)": "Std_Mack"}, inplace=True)

bootstrap_vs_mack

	Std_Bootstrap	Std_Mack
12-24	0.043661	0.041066
24-36	0.012139	0.012024
36-48	0.007259	0.005101
48-60	0.005214	0.003734
60-72	0.004090	0.003303
72-84	0.003727	0.003337
84-96	0.003769	0.004190
96-108	0.004113	0.006831
108-120	0.004184	0.003222

width = 0.3
ages = np.arange(len(bootstrap_vs_mack))

plt.bar(
    ages - width / 2,
    bootstrap_vs_mack["Std_Bootstrap"],
    width=width,
    label="Bootstrap",
)
plt.bar(ages + width / 2, bootstrap_vs_mack["Std_Mack"], width=width, label="Mack")
plt.legend(loc="upper right")
plt.xticks(ages, bootstrap_vs_mack.index)

([<matplotlib.axis.XTick at 0x731a4ee95810>,
  <matplotlib.axis.XTick at 0x731a4f034990>,
  <matplotlib.axis.XTick at 0x731a4f04da90>,
  <matplotlib.axis.XTick at 0x731a4f04fa90>,
  <matplotlib.axis.XTick at 0x731a4f051a90>,
  <matplotlib.axis.XTick at 0x731a4f053b10>,
  <matplotlib.axis.XTick at 0x731a4f034690>,
  <matplotlib.axis.XTick at 0x731a4f01a650>,
  <matplotlib.axis.XTick at 0x731a4f01c6d0>],
 [Text(0, 0, '12-24'),
  Text(1, 0, '24-36'),
  Text(2, 0, '36-48'),
  Text(3, 0, '48-60'),
  Text(4, 0, '60-72'),
  Text(5, 0, '72-84'),
  Text(6, 0, '84-96'),
  Text(7, 0, '96-108'),
  Text(8, 0, '108-120')])

While the MackChainladder produces statistics about the mean and variance of reserve estimates, the variance or precentile of reserves would need to be fited using maximum likelihood estimation or method of moments. However, for BootstrapODPSample based fits, we can use the empirical distribution from the samples directly to get information about variance or the precentile of the IBNR reserves.

ibnr = cl.Chainladder().fit(samples).ibnr_.sum("origin")

ibnr_std = ibnr.std()
print("Standard deviation of reserve estimate: " + f"{round(ibnr_std,0):,}")
ibnr_99 = ibnr.quantile(q=0.99)
print("99th percentile of reserve estimate: " + f"{round(ibnr_99,0):,}")

Standard deviation of reserve estimate: 139,153.0
99th percentile of reserve estimate: 3,106,429.0

/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:120: RuntimeWarning: overflow encountered in exp
  sigma_ = xp.exp(time_pd * reg.slope_ + reg.intercept_)
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:124: RuntimeWarning: overflow encountered in exp
  std_err_ = xp.exp(time_pd * reg.slope_ + reg.intercept_)
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:127: RuntimeWarning: invalid value encountered in multiply
  sigma_ = sigma_ * 0
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:128: RuntimeWarning: invalid value encountered in multiply
  std_err_ = std_err_* 0

Let’s see how the MackChainladder reserve distribution compares to the BootstrapODPSample reserve distribution.

plt.hist(ibnr.to_frame(origin_as_datetime=True), bins=50, label="Bootstrap", alpha=0.3)
plt.hist(dist, bins=50, label="Mack", alpha=0.3)
plt.legend(loc="upper right")

<matplotlib.legend.Legend at 0x731a4ef03ed0>

Expected Loss Methods with Bootstrap

So far, we’ve only applied the multiplicative methods (i.e. basic chainladder) in a stochastic context. It is possible to use an expected loss method like the BornhuetterFerguson method does.

To do this, we will need an exposure vector.

sample_weight = clrd["EarnedPremNet"].latest_diagonal

Passing an apriori_sigma to the BornhuetterFerguson estimator tells it to consider the apriori selection itself as a random variable. Fitting a stochastic BornhuetterFerguson looks very much like the determinsitic version.

# Fit Bornhuetter-Ferguson to stochastically generated data
bf = cl.BornhuetterFerguson(0.65, apriori_sigma=0.10)
bf.fit(samples, sample_weight=sample_weight)

/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:120: RuntimeWarning: overflow encountered in exp
  sigma_ = xp.exp(time_pd * reg.slope_ + reg.intercept_)
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:124: RuntimeWarning: overflow encountered in exp
  std_err_ = xp.exp(time_pd * reg.slope_ + reg.intercept_)
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:127: RuntimeWarning: invalid value encountered in multiply
  sigma_ = sigma_ * 0
/home/docs/checkouts/readthedocs.org/user_builds/chainladder-python/envs/main/lib/python3.11/site-packages/chainladder/tails/base.py:128: RuntimeWarning: invalid value encountered in multiply
  std_err_ = std_err_* 0

BornhuetterFerguson(apriori=0.65, apriori_sigma=0.1)

In a Jupyter environment, please rerun this cell to show the HTML representation or trust the notebook.
On GitHub, the HTML representation is unable to render, please try loading this page with nbviewer.org.

We can use our knowledge of Triangle manipulation to grab most things we would want out of our model.

# Grab completed triangle replacing simulated known data with actual known data
full_triangle = bf.full_triangle_ - bf.X_ + clrd["CumPaidLoss"]
# Limiting to the current year for plotting
current_year = (
    full_triangle[full_triangle.origin == full_triangle.origin.max()]
    .to_frame(origin_as_datetime=True)
    .T
)

As expected, plotting the expected development of our full triangle over time from the Bootstrap BornhuetterFerguson model fans out to greater uncertainty the farther we get from our valuation date.

# Plot the data
current_year.iloc[:, :200].reset_index(drop=True).plot(
    color="red",
    legend=False,
    alpha=0.1,
    title="Current Accident Year Expected Development Distribution",
)

<Axes: title={'center': 'Current Accident Year Expected Development Distribution'}>

Recap

• The Mack method approaches stochastic reserving from a regression point of view
  

• Bootstrap methods approach stochastic reserving from a simulation point of view
  

• Where they assumptions of each model are not violated, they produce resonably consistent estimates of reserve variability
  

• Mack does impose more assumptions (i.e. constraints) on the reserve estimate making the Bootstrap approach more suitable in a broader set of applciations
  

• Both methods converge to their corresponding deterministic point estimates