The "Modified Bornhuetter-Ferguson" Approach to IBNR Allocation [Discussion]

Trent Vaughn and Phoebe Tinney have presented a valuable methodology for allocating IBNR to allocation units that do not always warrant separate IBNR analyses. Vaughn and Tinney properly warn that: Actuaries should be aware, however, of the possible pitfalls of allocating IBNR down to an extremely fine level of detail. For instance, such allocations may incorrectly imply a degree of precision that does not exist. The actuary must be aware of this risk and communicate any concerns to the end user. But as we are quite painfully aware, there are times when the actuary has no choice. For instance, someone must allocate ceded IBNR to individual reinsurers in order to complete Schedule F–preferably someone who appreciates the implications of a misallocation. Though Vaughn and Tinney have suggested that their methodology may apply, the analysis process should not end there. This discussion highlights an area that is typically a pro forma accounting function, virtually ignored by actuaries, yet it has profound actuarial implications that deserve significant attention not yet addressed in actuarial literature.