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

Which statement best describes how the Bornhuetter-Ferguson method differs from the basic chain ladder method?

The Bornhuetter-Ferguson method keeps claims actually emerged to date and adds a reserve based on a prior expected ultimate multiplied by the proportion not yet developed, whereas chain ladder grosses up actual claims, making BF more stable for immature years.

  1. AIt uses a prior estimate of ultimate claims for the undeveloped portion rather than scaling up actual claims to dateCorrect
  2. BIt assumes claims development is independent of accident year and uses no development factors
  3. CIt always gives a higher reserve than the chain ladder method
  4. DIt requires the number of claims to be known exactly for each accident year
  5. It scales reported claims by the expected loss ratio only, ignoring development patterns

Explanation

BF combines actual claims to date with an a priori expected ultimate applied to the not-yet-developed proportion, so it is less sensitive to volatile early claims. It still uses development patterns, and it does not always give a higher reserve.

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