Reserving method combining an a priori loss ratio with observed experience through a credibility mechanism, more stable than pure chain ladder for recent accident years.
The Bornhuetter-Ferguson (BF) method corrects the main weakness of chain ladder for recent accident years: the high volatility of 12–24 month reported cumulative sharply amplifies estimated IBNR. BF anchors the estimate on an a priori loss ratio (expert or pricing-based) and only adds the portion not yet reported according to the development pattern. Formula: BF Ultimate = Reported Cumulative + (1 − % developed) × Premium × A priori LR. When % developed is close to 1 (mature year), BF converges to chain ladder; when close to 0 (recent year), BF is almost entirely driven by the a priori. BF quality depends entirely on a priori loss ratio quality: a poorly calibrated a priori biases all estimates.
Accident year 2023, 12 months: reported cumulative 1,150K EUR, premium 5 M EUR, a priori LR 70%, % developed 35%. BF ultimate = 1,150 + (1−0.35) × 5,000 × 0.70 = 1,150 + 2,275 = 3,425K EUR.
BF method, Bornhuetter Ferguson, BF, méthode BF, credibility reserving