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Bornhuetter-Ferguson Method

Insurance Term

An actuarial method to estimate ultimate losses for a given cohort of claims such as an accident year/product line component. If the paid-to-date losses are then subtracted from the estimated ultimate losses, the result is an indication of the outstanding losses.

The basic premise of the method is that the historical ratio of additional claim activity to earned premium for a given product line component/age-to-age period is stable and predictable. It implicitly assumes that the actual activity to date for past periods for that cohort is not a credible predictor of future activity for that cohort, or at least is not credible enough to override the "a priori" assumption as to future activity. It may be applied to either paid or case incurred claim data. It is used most often where the claim data is sparse and/or volatile and for relatively young cohorts with low volumes and/or data credibility.

To illustrate, the method may assume that the ratio of additional paid losses from the 12 to 24 month period for an accident year is 10% of the original "a priori" expected losses for that accident year. The original "a priori" expected losses are typically based on the original loss ratio assumption for that accident year, with subsequent adjustment as facts develop.

The ultimate losses equal actual activity to date plus the expected values for future periods.

   
     
Related Insurance Terms
                     
                     
 Accident Year   Case Reserves   Commercial Multi Peril Policies  
 Admitted Insurer   Casualty Insurance   Commutation Agreement  
 Annuity   Catastrophe Insurance   Deductible  
 Assigned Risk Pools   Catastrophe Loss   Deferred Acquisition Costs  
 Assumed Reinsurance   Catastrophe Reinsurance   Deficiency  
 Average Value Analysis   Cede, Ceding Company   Direct Written Premiums  
 Bornhuetter-Ferguson Method   Ceded Reinsurance   Earned Premiums or Premiums Earned  
 Capacity Insurance   Claim   Excess Liability  
 Captive   Claims And Claim Adjustment Expenses   Excess of Loss Reinsurance  
 Case Incurred Development Method   Cohort   Facultative Reinsurance  
               
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