Which Stochastic Model is Underlying the Chain Ladder Method?

The usual chain ladder metlwd is a deterministic claims reserving method. In the last years. o stochastic loglineor approximation to the chain ladder method hav been u~rl by several authors especially in order to quantify the variability of the estimated claims reserves. Although the reserves estimated by both merAo& are clenrly diflerent. rk logknenrapproxi-mation has been called " chain ladder. " too. by these nrcthors. In this note, we show that D different distribution-free stochusric model i.v underlying the chain ladder method; i.e. yie1d.s exactly the some claims reserves as the usual chain ladder method. Moreover. D comparison of this stochavic model with the above-mentioned lo-glinear approximation reveals that the nvo models rely on dtrerent philosophies on the claims process. Because of these fundamental diflercnces the loglinear approximation deviates from the usual chain ladder method in LI decisive way and should therefore not be called " chain ladder " any more. Finally, in the appendi.r it is shon:n that the loglinear approximation is much more volatile than the usual chain ladder method.