A comparative analysis of bornhuetter ferguson and basic chain ladder model in motor insurance: a case study of CIC insurance

Abstract

Claim reserving for motor insurance business is critically important.This has led to a slight mystery in motor insurance on how to go about claim reserving for which claims has not yet come in and there are still some figment of the future. One major critical problem in motor insurance has always been on how to calculate appropriate incurred but not reported claim reserve (IBNR) based on the data that is available on the claims that has occurred. Identifying the most appropriate model to use in modeling and estimating Incurred but not reported (IBNR) claim reserve in motor insurance has made claim reserving more intricate coupled with risks of de lay and underwriting process. This study aimed at comparing the analysis of IBNR in motor insurance using Bornhuetter Ferguson and Basic Chain Ladder model and determining the most appropriate model to use in claim reserving estimation in motor insurance so as to avoid and prevent com panies from going into financial insolvency. The objectives of this study were; to estimate and compare outstanding motor insurance claim liabil ity in each development year,evaluating and comparing the total claims for each particular accident year as well as to estimate and compare the next year’s motor insurance outstanding liability. This was achieved by applying the model in calculating outstanding reserves of motor insurance which was then determined by summing up all individual outstanding lia bility in each development year. The statistical tool used was MS. Excel. The estimates obtained from Bornhuetter Ferguson and Basic chain ladder model was then examined to determine the one that best fit the data at hand for any significant difference. This research recommended the use of basic chain ladder model since the claim development pattern was stable and there was a large amount of settled claim amount.However, both Ba sic Chain Ladder and B-F model should be applied cautiously, respecting their circumstance under usage by combining them with their subjective assessment of actuaries based on their expertise and experience.