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

THE “MODIFIED BORNHUETTER-FERGUSON” APPROACH 735TABLE 1REINSURANCE RECOVERABLEReinsurance Recoverable On:Paid Losses $1,000Paid LAE 200Known Case Loss Reserves 1,100Known Case LAE Reserves 200IBNR Loss Reserves 500IBNR LAE Reserves 0Unearned Premiums 2,000Contingent Commissions 0Total $5,000Ceded Balances Payable 0Other Amounts Due Reinsurer 0Net Amount Recoverable $5,000Funds Held by Company Under Reinsurance Treaty $5,0001. THE PROBLEM OF ALLOCATING CEDED IBNR TO INDIVIDUALINSURERSThe actuary makes one last review of his assumptions beforesigning his name to the loss reserve opinion. He reviews ScheduleF to satisfy himself that he has no reason to question thecollectibility of the client’s reinsurance recoverable. A particularunauthorized reinsurer catches his attention. The line for thatreinsurer is shown on Table 1.Just before he signs his name, he asks himself, “What happensif the ceded IBNR was incorrectly allocated to the unauthorizedreinsurer?”He has reviewed his analysis thoroughly, and is satisfied thatthe aggregate direct IBNR loss reserve of $2,000 is reasonable.He is even satisfied that the aggregate ceded IBNR of $1,500is reasonable. The actuary used Vaughn and Tinney’s ModifiedBornhuetter-Ferguson approach, and has allocated $500 ofthe $1,500 ceded IBNR to this particular reinsurer. For Vaughn