Cape Cod Credibility (CCC)

In many instances when using the BF method, we do not have an external source for the expected loss costs. In this situation, we will frequently use a weighted average of ultimate loss costs of the preceding accident periods. The Cape Cod method suggests using weights proportional to exposure and inversely proportional to development. Unfortunately, this approach fails to recognize variability in both the historical loss estimates and loss development factors. This paper attempts to recognize this variability, via credibility formula, and apply the results as alternative weights to the traditional Cape Cod method.

KEYWORDS: Trend, Credibility, Loss Development