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(iii) Bornhuetter- Ferguson (BF) Method - There are
many cases, where relying solely on paid or incurred
loss development methods may be inappropriate. The
development methods may produce unreliable results
for a new line of business, with little historical
information or a volatile line of business that is
subject to very large occasional losses, such as
contract bond surety.

Also fitting in this category are cases where losses
are reported over a long period of time, and have
very little loss reported in the first two to three years
such as excess insurance and reinsurance. In this
type of situations a method offering a blend of
stability and responsiveness is more appropriate. The
BF method estimates ultimate loss by adding together
actual reported loss with expected future incurred
development. Expected future incurred development
relies on expected losses and selected loss
development factors.

One advantage of the BF method is that it avoids
overreacting to unexpected losses.

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