BF Method + Cape Cod Method

Question 1

What is the BF technique?

Answer 1

A blend of the development and expected claims techniques. This splits the ultimate claims into two components:
1. Actual reported (or paid) claims
2. Expected unreported (or unpaid) claims

Question 2

Key Assumptions of the BF Method

Answer 2

• Unreported (or unpaid) claims will develop based on expected claims
  – Claims reported to date give no information about claims yet-to-be
  reported
• Reporting and payment patterns are the same as selected in the development method

Question 3

Common uses of the BF Method

Answer 3

• Frequently used with reported and paid claims
  – Can also be used with claim counts and ALAE
• Used for all lines of insurance
• Works with many time intervals - AY, PY, U/W year, Rpt year, Fiscal yr
• May organize data by year, half-year, quarter, or month

Question 4

Accuracy of the BF Method

Answer 4

• Advantage of method is that random fluctuations at early maturities do not
  significantly distort the projections
  
  • An exceptionally large claim should not be allowed to distort the IBNR
    reserves
• Frequently used for long-tail lines of insurance
  
  • Particularly for most immature years due to highly leveraged CDFs
• Used when data is extremely thin or volatile or both

Question 5

Benktander Method (Iterative BF)

Answer 5

Credibility-weighted average of BF and Development method. Uses BF estimate as the initial expected losses to run BF again

Question 6

Advantages of Benktander Method

Answer 6

• More responsive than BF and more stable than development method when there is no change in underlying claim development patterns
• Benktander always gives greater credibility than BF does to the development technique
• Significantly more responsive than the Expected Claims Technique
• Still more Stable than the Loss Development Technique

Question 7

Disadvantages of Benktander Method

Answer 7

• When claim development patterns are changing, benktander may not produce most appropriate estimate

Question 8

Advantages of the BF Method

Answer 8

• More responsive than the expected claims technique
• More Stable than the Loss Development Technique

Question 9

Cape Cod Technique

Answer 9

Ultimate claims = Actual reported claims + Exp Unreported Claims. This is similar to BF method. This uses the weighted average loss ratio from all years

Question 10

Difference with BF method

Answer 10

The expected loss ratio is obtained from all of the reported claim experience and evolves over time for cape cod. For BF method, the expected loss ratio is selected judgmentally or from historical claim experience and is fixed unless changed

Question 11

Pros of Cape Cod Method

Answer 11

– Not distorted by random fluctuations early in the development period
(same as BF method)
– ELR responds to changing claims ratios

Question 12

Cons of Cape Cod Method

Answer 12

– The method relies on reported claims to date; there must be a sufficient volume of credible reported claims in order to derive a reliable estimate
– When data is extremely thin or volatile, this method is not necessarily appropriate.

Question 13

What is the “used-up” premium?

Answer 13

The denominator of the expected loss ratio. This is the OLEP * % Reported

Question 14

What is the numerator of the expected loss ratio?

Answer 14

Actual reported claims