Sounds like either a medieval torture thing or a fireman's method of navigating a building.
Eh, maybe not.
The chain ladder method is a means for insurers to determine how much they need to keep on reserve to cover future claims made by their insureds (members). It’s the insurance company’s way to budget their savings. The chain ladder method identifies patterns by year, and assumes those patterns will hold in the future.
First, the insurer adds all loss estimates for the year to get the total annual loss. This can include claims and expense to settle them. The insurer can then pick one of the following methods to use as estimator: using the proportion of incremental claims losses in a year, proportion of cumulative losses in a year, or the ratio of the cumulative claims settled by this year compared to the previous year.
Then the claim data is compiled into a run-off (sometimes call development) triangle. The triangle is an excel sheet that shows losses by year (it isn’t actually a triangular graph). Each year's losses are added to the previous and multiplied by the estimator. By adding each year’s onto the preceding, it allows the insurer to see patterns.
For example, an insurance company with several years data using this method could tell by looking if they had a spike in claims made on a particular year. The company could then drill down to find the variable. Was there a natural disaster? A flu epidemic? If so, they could remove those claims from their estimates, assuming (well, hoping) lightning won’t strike twice.
