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IAI Actuarial Core Principles · Economic Modelling · Run-off triangles

In the Bornhuetter-Ferguson (BF) method for a run-off triangle, the estimate of ultimate claims for an accident year is made up of which two components?

The BF ultimate equals claims already paid to date plus the a priori expected ultimate multiplied by the proportion still undeveloped. It therefore blends actual experience for the emerged part with prior expectations for the remaining part.

  1. AClaims paid to date plus an a priori expected ultimate multiplied by the proportion not yet developedCorrect
  2. BClaims paid to date divided by the proportion developed, with no a priori estimate
  3. CThe a priori expected ultimate multiplied by the proportion developed, plus claims paid to date
  4. DClaims paid to date multiplied by the age-to-ultimate development factor
  5. The average of the latest diagonal and the a priori expected ultimate

Explanation

BF takes actual claims to date and adds an expected amount of still-to-emerge claims, computed as the a priori ultimate times (1 - proportion developed). The chain ladder instead scales actual claims by the development factor and ignores any a priori view. Option 2 uses the developed proportion for the unreported part, which is wrong.

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