Bornhuetter Ferguson (BF) Method

The BF Method combines two methods by splitting the Ultimate Losses into two components: Actual Losses and Expected Unreported (or Unpaid) Losses. As the years mature, more weight is given to the Actual Losses and Expected Losses (Loss Projection) gradually becomes less important. This method is a reasonable approach to estimating Ultimate Losses, especially for current or recently completed years, by smoothing the variance caused by the absence or presence of Large Claims.

The BF Method is useful for situations where the Actual Losses are not a good indicator of IBNR. This is often the case for low frequency but high severity lines of insurance. Another advantage of the BF Method is that it can be used even if there is not enough Historical Data. This method can be particularly useful when entering a new Line of Business. Additionally, the BF Method smooths the variance when there are random fluctuations or large claims at early maturities. This is useful for Long-Tailed Lines of Insurance such as medical malpractice or workers' compensation, particularly for the most immature years.