# Re: This Cape Cod Thing

michael.dubin@milliman.com
Wed, 22 Jul 1998 6:06:04 -0800

You're halfway to a descriptive name=2E If we call the BF method the "expe=
cted=20=
reserves method" and add, "with a systematic approach to calculating the=20=
expected loss cost" we might have a better name for the Cape Cod thing=2E

MIME:wan@scruggs=2Ecom on 07/21/98 03:16:46 PM
To: casnet@lists=2Ecasact=2Eorg @ INTERNET=20=
cc: (bcc: Michael Dubin/ATLA/M&R)
Subject: This Cape Cod Thing=20=

There is a reason why this Cape Cod Thing doesn't have
a descriptive name=2E=2E=2E=2Eit has too many components=2E It is essentially the=
=20=
Bornhuetter-Fergason method with
a systematic approach for calculating the Expected Loss
Cost=2E

In many cases, when using the BF method, we do not
have an external source for the expected loss costs=2E
With no other alternative, we frequently use the utimate loss costs implied=20=
by the corresponding development method=2E In doing so, we are giving full
weight to the indicated loss costs of the most recent
accident periods=2E

The Cape Cod method says that we should reduce the weight
for recent accident periods and it does so as follows=2E

For the Development Method, the Indicated Loss Cost for an
accident period is calculated as ILC =3D LDF X AMT / EXP, where
LDF is the ultimate development factor;
AMT is the current amount; and
EXP is the exposure=2E
When we calculate a weighted average of these loss costs, we
use EXP as the weights=2E

For the Cape Code Method, the Undeveloped Loss Cost for an
accident period is calculated as ULC =3D AMT / (EXP/LDF)=2E
We get the same loss costs for each accident period, but
we do not get the same weighted average of the loss costs=2E
Here the weights are (EXP/LDF)=2E We would use this weighted
average loss cost as the expected loss cost for all accident
periods=2E

With the Cape Cod method, we also have to adjust exposures
for changes in frequency and severity=2E

The "Generalized Cape Cod" method also calculates a unique
expected loss cost for each accident period as a weighted average
of the Undeveloped Loss Costs of the surrounding accident
periods=2E It adds another weighting factor that decays
exponentially=2E

I hope this helps=2E

Bill Niemczyk

Visit the CAS Web Site at http://www=2Ecasact=2Eorg
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