The Bornhuetter-Ferguson method is an actuarial technique used in the insurance industry to estimate the total loss or claim expense in a given period. It is a hybrid method that combines the expected value of total claims with the actual claims data.
The method is named after two actuaries, John Bornhuetter and Robert Ferguson, who developed it in the 1970s. They were trying to improve upon the traditional actuarial techniques that relied solely on historical claims data to estimate future losses. The Bornhuetter-Ferguson method takes into account the expected number of claims and the expected severity of those claims, as well as the actual claims experience during the period being analyzed.
To use the Bornhuetter-Ferguson method, actuaries first estimate the expected ultimate loss, which is the total amount of projected claims for the given period. This estimate is based on factors such as historical claims experience, industry trends, and economic conditions, among others.
Next, the actuaries determine the expected loss ratio, which is the ratio of expected losses to expected premiums. This is done by taking the expected ultimate loss and dividing it by the expected earned premium for the period.
Once these estimates are made, the actual loss experience is analyzed to adjust the expected ultimate loss and loss ratio accordingly. This is typically done on a quarterly or annual basis, depending on the insurer's reporting requirements.
The Bornhuetter-Ferguson method is particularly useful for insurers who have limited historical claims data, or who are entering a new line of business or market. It allows insurers to more accurately predict future losses and make better pricing decisions. It is also commonly used in reinsurance, where large amounts of claims data are available and the method's hybrid approach can be particularly effective.
Bornhuetter-Ferguson Method
Insurance Term
The Bornhuetter-Ferguson method is an actuarial technique used in the insurance industry to estimate the total loss or claim expense in a given period. It is a hybrid method that combines the expected value of total claims with the actual claims data.
The method is named after two actuaries, John Bornhuetter and Robert Ferguson, who developed it in the 1970s. They were trying to improve upon the traditional actuarial techniques that relied solely on historical claims data to estimate future losses. The Bornhuetter-Ferguson method takes into account the expected number of claims and the expected severity of those claims, as well as the actual claims experience during the period being analyzed.
To use the Bornhuetter-Ferguson method, actuaries first estimate the expected ultimate loss, which is the total amount of projected claims for the given period. This estimate is based on factors such as historical claims experience, industry trends, and economic conditions, among others.
Next, the actuaries determine the expected loss ratio, which is the ratio of expected losses to expected premiums. This is done by taking the expected ultimate loss and dividing it by the expected earned premium for the period.
Once these estimates are made, the actual loss experience is analyzed to adjust the expected ultimate loss and loss ratio accordingly. This is typically done on a quarterly or annual basis, depending on the insurer's reporting requirements.
The Bornhuetter-Ferguson method is particularly useful for insurers who have limited historical claims data, or who are entering a new line of business or market. It allows insurers to more accurately predict future losses and make better pricing decisions. It is also commonly used in reinsurance, where large amounts of claims data are available and the method's hybrid approach can be particularly effective.