Business Administration, Management, and Operations Commons^™

Bias Of Excluding High And Low Data For Long-Tailed Distributions, Cheng-Sheng Peter Wu

Journal of Actuarial Practice (1993-2006)

Property and casualty actuaries frequently employ a technique of averaging (called high-low averages) that excludes the same amount of data at both ends. For example, (0 in selecting loss development factors, the middle three of the latest five years or the middle eight of latest 12 quarters sometimes are used, or (ii) in calculating average expense ratios, the largest expense ratios and the smallest expense ratios may be removed from the sample. Although highlow averages can reduce the impact of influential data on analyzed results, the averages will result in downward bias when they are applied to pricing or reserving …