Cape Cod Method
What Is the Cape Cod Method?
The Cape Cod method is utilized to compute loss reserves for insurers, which use weights proportional to loss exposure and conversely proportional to loss development. The Cape Cod method operates under the assumption that premiums or other volume measures are known for historical accident years, and that ultimate loss ratios are indistinguishable for all accident years. The Cape Cod method is some of the time called the Stanard-Buhlmann method.
How the Cape Cod Method Works
The Cape Cod method depends on the system made by the Bornhuetter-Ferguson method of loss development, albeit the methods have important differences. The Bornhuetter-Ferguson method likewise fills in as the structure for the chain-stepping stool method and the added substance method. The primary difference between the Cape Cod and Bornhuetter-Ferguson methods is that the Cape Cod method makes ultimate loss gauges utilizing both internal and outside data.
In the Cape Cod method, loss reserves are calculated as the loss-to-date isolated by the exposure and afterward separated by the ultimate loss development factor. Both the loss-to-date and the rate of exposure are adjusted for trend. Cumulative losses are calculated utilizing a run-off triangle, which contains losses for the current year along with premiums and prior loss assessors. This makes a series of weights that are proportional to exposure and contrarily proportional to loss development.
Special Considerations
The most common way of organizing known methods of loss holding, under the umbrella of the extended Bornhuetter-Ferguson method, of which the Cape Cod method is a part, requires the identification of prior assessors of the development pattern and the expected ultimate losses. This interaction can be turned around by joining parts of various methods to get new adaptations of the extended Bornhuetter-Ferguson method. The Bornhuetter-Ferguson principle proposes the simultaneous utilization of different forms of the extended Bornhuetter-Ferguson method and a comparison of the subsequent indicators to choose the best indicators and to decide prediction ranges.
Reactions of the Cape Cod Method
The Cape Cod method has a few drawbacks. For example, it doesn't consider variability in both historical loss assessments and loss development factors, and the loss exposure is assumed to be steady over the long haul. This method can comprehend incurred yet not reported (IBNR) losses assuming the insurer is underwriting similar policies at lower rates over the long haul.
The method likewise gives greater weight to historical experience over recent experience, since more mature accident years are nearer to the ultimate loss. A best practice for actuaries is to utilize a loss saving method that joins the chain-stepping stool method with an exposure-based method, for example, the Cape Cod method.
Features
- A key drawback of the Cape Cod method is that it doesn't consider variability in both historical loss evaluations and loss development factors, and the loss exposure is assumed to be consistent after some time.
- The Cape Cod method, otherwise called the Stanard-Buhlmann method, assists with working out loss reserves.
- The Cape Cod method makes ultimate loss gauges utilizing both internal and outer data.
- This method works out loss reserves as the loss-to-date isolated by the exposure and afterward separated by the ultimate loss development factor.
