Could anyone please explain Bornhuetter Ferguson method of run off triangles? Firstly, I need to know for which types of claim data it is used-IBNR, incurred and reported claims or for paid claims? Secondly, I didn't get the need of this method. We have other simplier methods like-Basic chain ladder method and ACPC method for prediction. Then why BF method? How its different from other methods? Please anyone help! Thanks.
The Bornhuetter Ferguson method can be applied to either incurred or paid claims. If I recall correctly, the BF method is essentially a compromise between the Basic Chain Ladder method and the Expected(estimated) Loss Ratio. It is generally more preferred to be used for 'volatile' lines of business and/or new lines of business--for which you have little history to infer from--than the Basic Chain Ladder approach since the latter can be easily influenced by changes in the claims development pattern. The formula is Emerging Liabilities = Premium * Estimated Loss Ratio * (1-1/f), where f is the cumulative development factor.
In the full reading they use f as the product of the cumulative development factors, up until the development year but I have noticed in some past papers the markers use f as just the cumulative development factor, which one must we then use?
