Claim reserving prediction with Bornhuetter-Ferguson method

Abstract

In the long-tail business insurance class, claim settlement takes at least one year, since the claim was filed. This is because insurance companies must investigate in advance of the incident. The problem in the long-tail business can be attributed to the large or unresolved number of claims, called outstanding claims. The prediction of outstanding claims has an important role considering insurance companies are required to allocate sufficient reserves for future payment of claims. Generally, the problem of prediction of outstanding claims utilizes run-off triangle. Run-off triangle is an instrument, which is used to analyze the relationship between claims payments that have been made over the past few years. One of the prediction methods that commonly used is the Bornhuetter-Ferguson method. This method will be applied to the paid loss and ALAE Commercial Auto/Truck Liability/Medical insurance data, which is obtained from Highline Annual Statement Schedule P Data from all industry in the United States for the period 1999-2008, where the claim payment is stated in USD (000's).