PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

DISCUSSION OF A PAPER PUBLISHED INVOLUME XCITHE “MODIFIED BORNHUETTER-FERGUSON”APPROACH TO IBNR ALLOCATIONTRENT VAUGHN AND PHOEBE TINNEYDISCUSSION BY GLENN WALKERAbstractTrent Vaughn and Phoebe Tinney have presented avaluable methodology for allocating IBNR to allocationunits that do not always warrant separate IBNR analyses.Vaughn and Tinney properly warn that:Actuaries should be aware, however, of thepossible pitfalls of allocating IBNR down toan extremely fine level of detail. For instance,such allocations may incorrectly imply a degreeof precision that does not exist. The actuarymust be aware of this risk and communicateany concerns to the end user.But as we are quite painfully aware, there are timeswhen the actuary has no choice. For instance, someonemust allocate ceded IBNR to individual reinsurers in orderto complete Schedule F–preferably someone whoappreciates the implications of a misallocation. ThoughVaughn and Tinney have suggested that their methodologymay apply, the analysis process should not endthere.This discussion highlights an area that is typically apro forma accounting function, virtually ignored by actuaries,yet it has profound actuarial implications thatdeserve significant attention not yet addressed in actuarialliterature.734