Bornhuetter-Ferguson: Initial Expected Losses Working Party

Bornhuetter-Ferguson: Initial Expected Losses Working Party • Co-Chair: Jeff Carlson FCAS, MAAA Towers Perrin (Tillinghast) • Co-Chair: Chris Olson FCAS, MAAA St. Paul Travelers 2004 CLRS Las Vegas, NV Session 7: Research Working Party Kick-off

Rationale • Bornhuetter-Ferguson is one of the most heavily relied upon reserving methods • Can be thought of as a credibility weighted estimate of chain-ladder indication and initial expected losses • Much written about chain-ladder method, relatively little about initial expected losses

Rationale (continued) • Seminal paper for the method simply says that if the “expected loss ratio cannot be selected with much accuracy, a high ratio should be used.” • Goal of this working party is to publish a paper to provide guidance for practitioners and education for students

Working Party Scope • Do not intend to engage in primary research • Want to leverage initial expected loss approaches already in use, whether documented or not • Many smart people using Bornhuetter-Ferguson method, probably many very good IEL approaches already exist

Examples of Approaches #1 IEL = initial expected loss ratio x earned premium initial expected loss ratio can come from: -industry loss ratios or other benchmarks -company pricing assumptions -projected prior year loss ratios adjusted for price/trend

Examples of Approaches #2 IEL = initial expected loss cost x number of exposures initial expected loss cost can come from: -industry loss costs or other benchmarks -prior year loss costs adjusted for trend

BF IEL Working Party Timetable

BF IEL Working Party • Will have two classes of working party members • ‘Core’ members will participate in all tasks • ‘Team’ members will be asked to help identify literature, survey their workplaces, write summaries of their findings, and help review the final paper • Purpose is to keep number of members actually doing the writing to a manageable size • Also, people who don’t want to commit too much time can participate

BF IEL Working Party • Looking for about 10 ‘Core’ members and about 20 ‘Team’ members, although all who express interest will be considered • Ideally, members would represent a broad cross-section of professional types

BF IEL Working Party • Questions?

Bornhuetter-Ferguson: Initial Expected Losses Working Party