G.4. Cape Cod Method

Question 1

CC formula for estimated ultimate claims

Answer 1

CC Ultimate = Reported + On-level EP x ECR x % unreported

Question 2

Cape Cod ECR formula and steps

Answer 2

Cape Cod ECR = (Sum of reported claims)/[sum of (on-level premium x % reported)]

Question 3

Main assumption of Cape Cod method

Answer 3

Unreported claims will develop based on expected claims, and expected claims are derived using reported claims and earned premium

Question 4

Advantages of Cape Cod

Answer 4

Key: ECR is estimated from historical data rather than being judgmentally selected
Also: random fluctuations at early maturities do not significantly distort estimates

Question 5

Disadvantages of Cape Cod

Answer 5

Can’t be used for new line of business
Highly dependent on appropriate on-leveling of premium, which can be difficult
When data is thin or volatile, ECR will not be reliable

Question 6

Speedups or slowdowns, Cape Cod

Answer 6

Will be accurate since it is based on reported claims

Question 7

Changes in case reserve, Cape Cod

Answer 7

Increase will overstate – error is larger in magnitude than BF but not as large as CL

Question 8

Changes in claim ratios and Cape Cod

Answer 8

More responsive than BF since it uses most recent exposure periods. For increasing claim ratios, Cape Cod will underestimate but not as much as BF

Question 9

Exposure growth, Cape Cod

Answer 9

Growing book causing average accident date to be later in more recent years – CC will underestimate

Question 10

Mix of business changes, Cape Cod

Answer 10

Inaccurate if:
Segments of business that are changing have different development patterns
Segments that are changing have different ECRs