Loss development patterns in the past are used to estimate how claim amounts will increase (or decrease) in the future.
This is a technical reserve of an insurance company, and is established to provide for the future liability for claims which have occurred but which have not yet been settled.
This is different from social insurance where one typically has a pay-as-you-go system which means that premium payments are not matched to the contracts that cause the claims[2] Various statistical methods have been established for the calculation of outstanding claims reserves in general insurance.
Later actuaries started to develop and analyze underlying stochastic models that justify these algorithms.
[5] These stochastic methods allow one to analyze and quantify the prediction uncertainty in the outstanding loss liabilities.