Cape Cod¶
Assumption: ECR should be calculated based on historical loss experience including the current exposure period, as that experience does provide useful experience about future development.
Same as B-F with four additional specifications:
- On-level all premiums to the same level (usually Current)
- Use a weighted average to find the LR
- Don't develop losses, instead use "used-up" premiums.
- Use the latest experience period also (unlike standard BF method)
\[
\text{Cape Cod ECR} = \dfrac{\sum \text{Reported Claims}}{\sum(\text{OLEP}\times\%\text{Reported})}
\]
- Cape Cod estimate is not an "a priori", it is calculated from historical data.
- No judgmental selection
Nitty-Gritties¶
- Since we used OLEP to calculate CC ECR, we have to use On-levelled premiums to calculate IBNR. Contrast this with standard Expected claims method, where if we are given an a priori ECR, we just have to use NOT On-levelled premiums.
- To confuse you, they might ask you to find loss ratio of a particular AY, using CC method. They would have given both the on-levelled premiums and actual premiums. Know that the point of on-levelling premiums was only for the calculations of the ultimate. The definition of a loss ratio still remains the same: "Ultimate losses to the earned premiums in that CY" so we will use the actual premiums, for LR (not CC ECR) calculation.
- To summarize the above two:
- While calculation of ultimate losses/IBNR, use OLEP
- While calculation of LR of any year, use Actual EP