The Bornhuetter–Ferguson method is a
loss reserving Loss reserving refers to the calculation of the required reserves for a tranche of general insurance business.Schmidt, K. D., Zocher, M.The Bornhuetter–Ferguson Principle Variance 2:1, 2008, pp. 85-110. It includes outstanding claims reserves.
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technique in insurance.
Background
The Bornhuetter–Ferguson method was introduced in the 1972 paper "The Actuary and IBNR", co-authored by Ron Bornhuetter and Ron Ferguson.
[The actuary and ibnr]
casact.org
Like other loss reserving techniques, the Bornhuetter–Ferguson method aims to estimate
incurred but not reported
In insurance, incurred but not reported (IBNR) claims is the amount owed by an insurer to all valid claimants who have had a covered loss but have not yet reported it. Since the insurer knows neither how many of these losses have occurred, nor the ...
insurance claim amounts. It is primarily used in the
property and casualty and
health insurance fields.
Generally considered a blend of the
chain-ladder and expected claims loss reserving methods,
the Bornhuetter–Ferguson method uses both reported or paid losses as well as an
''a priori'' expected
loss ratio to arrive at an ultimate loss estimate.
[Basic Ratemaking]
casact.org Simply, reported (or paid) losses are added to ''a priori'' expected losses multiplied by an estimated percent unreported. The estimated percent unreported (or unpaid) is established by observing historical claims experience.
The Bornhuetter–Ferguson method can be used with either reported or paid losses.
Methodology
There are two algebraically equivalent approaches to calculating the Bornhuetter–Ferguson ultimate loss.
In the first approach, undeveloped reported (or paid) losses are added directly to expected losses (based on an ''a priori'' loss ratio) multiplied by an estimated percent unreported.
In the second approach, reported (or paid) losses are first developed to ultimate using a chain-ladder approach and applying a
loss development factor (LDF). Next, the chain-ladder ultimate is multiplied by an estimated percent reported. Finally, expected losses multiplied by an estimated percent unreported are added (as in the first approach).
The estimated percent reported is the reciprocal of the loss development factor.
Incurred but not reported
In insurance, incurred but not reported (IBNR) claims is the amount owed by an insurer to all valid claimants who have had a covered loss but have not yet reported it. Since the insurer knows neither how many of these losses have occurred, nor the ...
claims can then be determined by subtracting reported losses from the Bornhuetter–Ferguson ultimate loss estimate.
References
{{DEFAULTSORT:Bornhuetter-Ferguson method
Actuarial science