Adjustments to the B-F Reserving Method 1999 Casualty Loss Reserve Seminar September 14, 1999 Ted Dew

Adjustments to the B-F Reserving Method Agenda Background The Adjustment Some Formulas Examples

Opinions expressed are mine alone Considerations: Opinions expressed are mine alone Judgment should supercede ANY formula Application may be limited Credibility measure is judgmental I think that these reliances and the background will help put the discussion into proper context. First, the opinions and ideas expressed are not necessarily those of my employer or of the CLRS organizers. I take full responsibility for this. As with any method, I believe that actuarial judgment plays a large part in its application. Clear understanding of the nature of the business reviewed and the nature of the insurer are important aspects of developing any reserve estimate. The method describe might have limited application (again, refer to the judgment statement) Finally, the credibility measure used is based on judgment and not a formal derivation.

London Market and Bermuda Reinsurance Reserving Pricing Information Not Readily Available ELRs Selected Based on Judgment Ultimate Loss Ratios Volatile Reporting Patterns Volatile Payment Patterns Slow and Unreliable

Motivation Desire to formalize alternative projection of ultimate losses Prior ultimate loss selection would seem to have some value in selecting current a priori estimate of expected losses

Last Year’s Selected Ultimate Last Year’s Initial Expected Balance of Stability and responsiveness Last Year’s Initial Expected

What should be used for the a priori loss estimate? What are the implications of this adjustment?

Bornhuetter - Ferguson Formula The BF Method Combines Actual Reported Losses and Expected Unreported Losses This can also be thought of as a credibility weighting between the Loss Development Method and the Expected Loss Method

Adjusted Bornhuetter - Ferguson Formula Almost a credibility weighting of ILDM, SULt-1, and ELMt-1

What is an appropriate Y? Suggest Y is a function of the Reporting Pattern from prior analysis

Sample Adjusted Expected Loss Ratios Using Alternative Credibility Measures

Adjusted Bornhuetter - Ferguson Example Questions Good bye