The “Modified Bornhuetter-Ferguson” Approach to IBNR Allocation,Trent Vaughn, Republic Insurance Phoebe Tinney, Towers Perrin,What makes a good IBNR allocation procedure?,Provide reasonable and stable results Easy to automate Explainable in “intuitive terms” No need for “off-balance adjustment factor” Allows for differences in a priori loss ratios,Why allocate IBNR?,Annual Statement requirements Management reports Reinsurance Accounting,Potential Pitfalls of IBNR Allocation,May imply degree of precision that does not exist May be occasions when full reserve study is required instead of allocation,Two Common Methods for Allocating IBNR,Earned Premium Method Weakness: Ignores differences in claim frequency and loss ratio by program Case-Incurred Loss Method Weakness: Often results in very unstable and unreliable allocations,“Modified BF Method”,Compromise between earned premium and case-incurred loss allocations Relative weights assigned to each method vary by accident year Immature Accident Years: Most of the weight goes to EP allocation Older Accident Years: Most of the weight goes to Case Incurred Allocation Numeric Example,Loss Projections & Earned Premium,Step 1: Earned Premium Method,Step 2: Case Incurred Loss Method,Step 3: Calculating Weights,Step 4: Weighted Average Allocation,Alternative: Expected Loss Method,Mature Accident Years,Modified BF Procedure may not work as well as simpler methods Will allocate largely in accordance with case-incurred loss May be more appropriate to allocate in proportion to open claims or case reserves,Negative IBNR amounts,“Implied LDF” in Modified BF weighting procedure will be less than unity Thus, weight given to case-incurred allocation is greater than 1, weight given to EP allocation is negative For negative IBNR, straight case-incurred allocation may be more appropriate,