Cape Cod Method
The Cape Cod method is an actuarial reserving technique that combines the chain ladder method with a stabilizing expected loss ratio derived from the entire portfolio.
Concept
The Cape Cod method (also known as the Stanard-Bühlmann method) is an actuarial reserving technique for estimating ultimate claims cost that calculates the expected ultimate loss ratio, derived from claims already developed across multiple accident years, as a weighted average across the entire portfolio, rather than extrapolating it separately for each accident year as under the chain ladder method.
Approach
The method first calculates a portfolio-wide expected loss ratio by dividing the sum of reported losses across all accident years by the sum of the respective “earned,” development-weighted premiums; this ratio is then applied to the not-yet-developed portion of each individual accident year to estimate the IBNR reserve.
Advantages over the Chain Ladder Method
The Cape Cod method produces more stable and less volatile estimates than the pure chain ladder method, particularly for young, less-developed accident years, since it incorporates information from the entire portfolio rather than relying exclusively on the limited claims experience of a single accident year; it is therefore frequently used as a complement to, or sanity check on, the chain ladder method.