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Surety

Surety . Loss Reserving Issues. Joseph Malsky, ACAS St. Paul Companies. Agenda. What drives surety losses? Unique reserving aspects of surety? Reserving techniques and considerations?. Overview . Surety is not like insurance A surety extends credit much like banks do. Underwriting.

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Surety

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  1. Surety Loss Reserving Issues Joseph Malsky, ACASSt. Paul Companies Casualty Loss Reserve Seminar

  2. Agenda • What drives surety losses? • Unique reserving aspects of surety? • Reserving techniques and considerations? CLRS 2

  3. Overview • Surety is not like insurance • A surety extends credit much like banks do Underwriting Construction Spending Economy Obligee Surety Principal Contract Money Collateral Defaults CLRS 3

  4. Surety Loss Trends • Economy key driver of surety results • 1990’s fantastic decade for surety industry • Contract Surety v. Commercial Surety CLRS 4

  5. Economic Trends Source: U.S. Department of Labor; Federal Reserve Board Release; Bureau of Economic Analysis, AM Best CLRS 5

  6. Public Construction Spending v. Surety Industry C/R Source: AM Best’s Aggregates & Averages; U.S. Census Bureau. CLRS 6

  7. Contractor Failure Rates & Liabilities Source: Dunn and Bradstreet Business Failure Record CLRS 7

  8. Selection of Actuarial Reserving Methods • Selection will vary with • Size of company • Available data • Nature of surety business • Considerations influencing selection of method • Analysis of controls and reporting • Handling of contract monies • Peculiar Large Claims • Recoveries • External influences CLRS 8

  9. Unique Reserving Issues • Surety in theory priced and underwritten to be loss free • Accident Date • Collateral & Salvage • ALAE reserving CLRS 9

  10. Accident Date • How to define for contract surety? When was the default on the bond? • What if the notice of loss is outside the bond period? • Should it be consistent for all claims/bonds for a principal? CLRS 10

  11. Collateral & Salvage • Evaluation for open known claims generally different than for IBNR claims • Types of Collateral: • Contract Money • LOC’s • Indemnity • Project Shares • Mortgages CLRS 11

  12. Gross Loss Development CLRS 12

  13. Gross Loss Development CLRS 13

  14. Putting it all together… CLRS 14

  15. Summary • Surety losses are not fortuitous, but are sensitive to the economy • Collateral and Salvage play a big role in reserve analyses • Understand your underlying data and mix of business • Know your underwriters and claim attorneys CLRS 15

  16. Future Study • Loss development analysis based on credit ratings for commercial surety? • Application of loss distributions? • Cat reserving techniques? • Can PML and default rate studies benefit reserve analyses? CLRS 16

  17. Where to Get More Information • SAA and SIO • NASBP seminars • Principles of Suretyship, by Fitzgerald, et.al. • Surety Rate-Making, by Backman CLRS 17

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