Parameter Estimation for Bornhuetter/Ferguson

The Bornhuetter/Ferguson loss reserving method consists of selecting a development pattern and, for each accident year, an initial ultimate loss ratio. From these, the reserve estimate is derived. In this paper, the usual way to obtain the development pattern from the chain ladder link ratios is criticized because it assumes a multiplicative connection between past and future loss amounts whereas the Bornhuetter/Ferguson method establishes an additive connection (i.e. an independence). Therefore, an alternative approach to drive and select a development pattern is proposed. Furthermore, the raw data usually contain some implicit information about the underwriting cycle. This paper shows how this information can be extracted from the data and used in the selection of the initial ultimate loss ratios. Altogether the proposed approach is believed to align with the concepts of Bornhuetter and Ferguson better than the conventional approach does. The result is a standalone reserving method which does not rely upon the use of chain ladder elements.