Cape Cod method

Category: Actuarial fundamentals · Reviewed by Simon Temme, Account Executive · Last reviewed

Cape Cod method

The Cape Cod method (also Stanard-Bühlmann method) is a reserving technique that estimates the expected loss ratio (ELR) directly from the data rather than taking it as an external prior. It was published in 1985 by James Stanard and (independently) Hans Bühlmann, and refined at the Cape Cod actuarial seminar from which it takes its name.

Formula

ELR (Cape Cod) = Σ Reported losses / Σ (Premium × proportion of ultimate emerged)

This data-driven ELR is then used in the Bornhuetter-Ferguson formula:

Ultimate = Reported + (Premium × ELR × (1 − 1/f))

Why use Cape Cod?

• Removes the subjectivity of choosing an a priori ELR.
• Stabilises immature years more than pure chain ladder while not relying on external pricing.
• Honest about credibility — older, more developed years dominate the ELR estimate.

Limitations

• A single ELR is applied across all years; if the rating cycle has shifted (hard vs soft markets), year-specific ELRs are needed.
• Sensitive to outlier accident years.

References

• Stanard, J.N. (1985). A simulation test of prediction errors of loss reserve estimation techniques. Proceedings of the Casualty Actuarial Society 72.
• Bühlmann, H. (1983).
• IFoA. General insurance reserving guides.

Cross-references

• Bornhuetter Ferguson method
• Chain ladder method
• Loss development

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