Moreover, the model gives important advice on how to estimate the parameters for the BF reserve formula. For example, it turns out that the appropriate BF development pattern is different from the CL pattern. This is a nice add-on as it makes BF a standalone reserving method that is fully independent from CL. The other parameter required for the BF reserve is the well-known initial estimate for the ultimate claims amount. Here the stochastic model clearly shows what has to be meant with “initial.”
In order to apply the formula for the prediction error, the actuary must assess his uncertainty about both sets of parameters, about the development pattern and about the initial ultimate claims estimates. But for both, much guidance can be drawn from the estimates themselves and from the run-off data given. Finally, a numerical example shows how the resulting prediction error compares to the one of the CL method.
Keywords: Loss reserving, Bornhuetter-Ferguson, Stochastic model, Prediction error.
