Accident Year to Underwriting Year
I've searched the forum and I'm having a hard time understanding the explanations given so far.
I need to take AY losses, evaluated in 12-month intervals starting at month 12, and convert them to UY losses. I've seen three different people draw the parallelogram, but I have yet to get an explanation of the various lines mean, what the angles mean, etc. I've also heard a lot about "average accident date" and lagging development factors.
My general working theory so far is to take whatever the development factor is at the AY factor (say 12-24 period factor is 2.5). I figure out the difference between the AY average accident date (under some simple assumptions), and declare it to be 6 months. The difference between the average accident date and the AY evaluation date is 6 months. I take the UY average accident date (12 months) and then I say, the corresponding UY evaluation date is 18 months. The logic here, right or wrong (please correct), is that if 2.5 was the development factor when the AY was 12 months mature, or 6 months past its average accident date, then the same factor must apply to the UY when it is equivalently mature - i.e., at 18 months, 6 months more mature than its average accident date.
After that I do a linear interpolation to whatever date I want.
If this is a jumble, please either point me in the right direction or explain. If it's clear but wrong, please state why, although I'll settle for "That is wrong," so I know not to use it.
Thanks for any help anyone may have to offer on this subject!