Cape Cod

Question 1

What are the advantages of Cape cod?

Answer 1

More responsive than Dev technique and BF to recent experience

Compared to BF, it uses actual data to determine ECR or exp loss rate PP , therefore more responsive to changes in ECR or exp loss rate PP

Question 2

What are the steps of cape cod?(ECR)

Answer 2

For each AY:
1. Calculate Used-up Premium = %reported x EP
2. Calculate ECR = Reported Claims as of __/ Used-up Premium

Total ECR = Total Reported Claims as of __/ Total Used-up Premium
For each AY:
1. Est expected claims =Total ECR x EP
2. %Unreported= 1-1/CDF
3. Expected unreported claims=IBNR =%Unreported x Est expected claims
4. Proj Ult Claims= Reported claims + exp unreported claims
5. Case O/s= reported-paid
6. IBNR=Proj Ult Claims-Reported
7. Est unpaid claims = Case O/s + IBNR

Question 3

Who are the users of Cape Cod?

Answer 3

Reinsurers

Question 4

What is the difference between Cape Cod and BF

Answer 4

Use of actual data to calculate ECR instead of a priori estimate

Question 5

What is the difference between Cape Cod, BF and DF

Answer 5

Cape cod is based on expected claims which is based on reported claims and EP

Question 6

Is Cape cod used with reported or paid claims

Answer 6

Reported

Question 7

Key assumption of Cape Cod

Answer 7

Unreported claims will develop based on expected claims , which is derived from reported claims and EP

Question 8

Cape cod formula

Answer 8

Ult claims = Actual reported claims + Expected Unreported claims

Question 9

What is the difference between Cape cod and BF

Answer 9

The derivation of Expected claims

Cape cod - Expected claims is obtained from reported claims experience
Uses wtd avg claim ratio FROM ALL YEARS

BF - Expected claims is obtained from independent and judgement selection
EC and BF -Different claim ratios for earlier years and recent year

Question 10

What is a key concept of Cape Cod

Answer 10

Used-up premium = % reported x EP

Used-up exposures = %reported x EE

Question 11

What is Cape Cod otherwise called

Answer 11

Stanard Buhlmann

Question 12

What is %reported?

Answer 12

%reported = 1 divided by age-to-ultimate
OR 1/ CDF

Question 13

What is used-up premium used for?

Answer 13

Used-up premium is used to calculate estimated claims ratio for each year in the experience period

Question 14

What is used up exposures used to calculate?

Answer 14

used up exposures are used to calculate estimated pure premiums

Question 15

Formula for estimated claim ratio ECR

Answer 15

ÉCR= Reported Claim/ Used-up Premium

Question 16

What are the steps of cape cod?(EPP)

Answer 16

For each AY:
1. Calculate Used-up Exposures = %reported x EE
2. Calculate EPP= Reported Claims as of __/ Used-up Exposures

Total EPP= Total Reported Claims as of __/ Total Used-up Exposures
For each AY:
1. Est expected claims =Total EPP x EE
2. %Unreported= 1-1/CDF
3. Expected unreported claims=IBNR =%Unreported x Est expected claims
4. Proj Ult Claims= Reported claims + exp unreported claims
5. Case O/s= reported-paid
6. IBNR=Proj Ult Claims-Reported
7. Est unpaid claims = Case O/s + IBNR

Question 17

Two formulas of Case O/s

Answer 17

1. Reported - Paid
2. unpaid claim estimate - IBNR

Question 18

Formula for est IBNR

Answer 18

Proj Ult claims - Reported

Question 19

Formula for unpaid claim estimate

Answer 19

Case O/s + Est IBNR

Question 20

Advantage of Cape Cod versus Development Technique

Answer 20

Not distorted by random fluctuations early in the development of AY

Question 21

What is the determining factor influencing fluctuations

Answer 21

The extent to which actual claims for most recent years affect derivation of expected claims for such years

Question 22

When is CC not necessarily as appropriate as BF

Answer 22

When data is thin or volatile or both

Question 23

What is required for a reliable expected claims estimate

Answer 23

Sufficient volume of credible reported claims

Question 24

What adjustments are made to claims and premiums

Answer 24

On-level premiums
Adjust claims for trends, benefit changes

Question 25

What must an actuary take into consideration when evaluating results of various techniques and selecting final ultimate claims?

Answer 25

Simplifying assumptions like not adjusting rate level changes

Question 26

Which techniques produce an accurate IBNR in a Steady-state environment?

Answer 26

Development technique Expected Claims BF CC

Question 27

What is weakness of EC and BF which CC does NOT have

Answer 27

Lack of responsiveness to actual emerging claims since they

Question 28

Which method is more responsive when claims ratios are increasing? BF OR CC

Answer 28

CC

Question 29

What effect does increasing case strength have on expected claims?

Answer 29

Increasing case strength => increased CDF => increased expected claims => CC overstates IBNR more than BF

Question 30

What is the impact on increasing case outstanding adequacy and increasing claim ratios?

Answer 30

CC overstates IBNR

Question 31

Describe the Cape Cod method

Answer 31

The priori loss ratio is calculated as the weighted average of the chain ladder ultimate loss ratios across all years with the “used” premium as the weights. It applies the same a priori loss ratio estimate (on a trended, current rates level) across all years, without consideration for any possible changes that may have occurred. A difficulty arises when the loss ratios show improvement or deterioration,

Question 32

Drawbacks of CC

Answer 32

1. Does not account for variability in historic losses and loss development factors 2. Assumes constant loss exposure over time 3. Gives greater weight to more historic years than more recent years as mature years are closer to ultimate loss 4. Premiums must be brought to current rate level - may be difficult to obtain appropriate OLP for older years of data 5. Produces inaccurate results when there are changes in case reserve adequacy as rep CDF (%unrep) will not account for this change and ECR will be impacted 6. Produces inaccurate results when claim ratios are changing. The method is somewhat responsive, it uses multiple years of data to calculate ECR so ECR will not reflect the newest claim ratios

Question 33

What can CC understand

Answer 33

IBNR if insures is writing same policies at a lower rate over time

Question 34

Cape Cod Estimated ultimate loss ratio

Answer 34

Ult loss= reported + CC IBNR LR= Ult loss/EP <— not OLEP (same as BF)

Question 35

Wtd avg of CC and CL reserve -which method should get more weight in older years and recent years

Answer 35

More weight to CC Reserve in most recent AYs since CL will be very unstable in recent years More weight to CL Reserve in older years since older year data is more mature , while it will be more difficult to get on-leveled premium in older years

Question 36

Why CC is a special case of BF

Answer 36

Both calculate IBNR = ECR x EP x %unrep Difference is how ECR is calculated- BF it is a priori while CC is calculated using actual data including latest exposure period

Question 37

How to calculate CC IBNR from BF IBNR

Answer 37

CC IBNR = BF IBNR /BF ECR x CC ECR CC IBNR = BF IBNR/BF Exp loss rate PP x CC Exp loss rate or PP