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CASUALTY LOSS RESERVE SEMINAR

CASUALTY LOSS RESERVE SEMINAR. Reserving for Automobile Warranty and Other Long Duration Contracts Part 2 - New Home Warranty Presented by: Paul J. Struzzieri September 11, 2001. NEW HOME WARRANTY - OUTLINE. Origins of Home Warranty Description of Coverage Considerations for Reserving

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CASUALTY LOSS RESERVE SEMINAR

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  1. CASUALTY LOSS RESERVE SEMINAR Reserving for Automobile Warranty and Other Long Duration Contracts Part 2 - New Home Warranty Presented by: Paul J. Struzzieri September 11, 2001

  2. NEW HOME WARRANTY - OUTLINE • Origins of Home Warranty • Description of Coverage • Considerations for Reserving • Financial Reporting • Reserving Techniques

  3. ORIGINS OF HOME WARRANTY • Early 1970’s – US proposes $10,000 escrow • NAHB response = insured warranty program • HOW program formed (1973) • HOW into receivership (1994)

  4. DESCRIPTION OF COVERAGE • Three Coverages: • Workmanship (1 year) • Systems (2 years) • Structural (up to 10 years) • Insured = Builder • Beneficiary = Homeowner • Covers all claims reported during policy term • Cannot cancel; no premium refund

  5. CONSIDERATIONS FOR RESERVING - STRUCTURAL • Soil Conditions • Climate • Risk management • Claims handling philosophy

  6. FINANCIAL REPORTING - LOSSES • Loss reserve corresponds to reserve for reported claims • Need by report year (Schedule P) • Need by policy year (Tests 2 & 3) • No discounting allowed

  7. FINANCIAL REPORTING - UPR • UPR corresponds to unreported (i.e., future) claims • Rule requires an estimate of “future” losses by PY • Test 2 needs future losses and expenses in numerator of ratio • Test 3 needs discounted future losses and expenses • Salvage & subrogation - can take credit • Deductibles - credit taken only if secured by LOC

  8. RESERVING TECHNIQUES • Report year analysis = ultimate losses for reported claims • Use results to get: – Loss reserve (reported claim reserve) – Implied RY loss development factors • The latter is useful in determining reported claim reserve by policy year – Which is then useful in determining unreported claim reserve by PY – Which is required for Tests 2 and 3

  9. RESERVING TECHNIQUES

  10. RESERVING TECHNIQUES

  11. RESERVING TECHNIQUES

  12. RESERVING TECHNIQUES 10 Year Structural

  13. RESERVING TECHNIQUES

  14. RESERVING TECHNIQUES • Report lag analysis - provides triangle of losses reflecting ultimate value of reported claims by PY • Develop this triangle to ultimate to estimate ultimate value of all claims by PY • Recommend using Cape Cod or BF methods • Value of all claims less value of reported claims = value of unreported claims

  15. RESERVING TECHNIQUES 10 Year Structural

  16. POLICY YEAR REPORTING PATTERN 10 Year Structural

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