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John Kerper, FSA, MAAA JHK Company

Reserving for Automobile Warranty and Other Long Duration Contracts Gap & Residual Value 2001 Casualty Loss Reserve Seminar. John Kerper, FSA, MAAA JHK Company. Purpose. Introduce Gap and Residual Value coverages and the methods of estimating unearned premium reserve for these coverages.

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John Kerper, FSA, MAAA JHK Company

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  1. Reserving for Automobile Warranty and Other Long Duration ContractsGap & Residual Value2001 Casualty Loss Reserve Seminar John Kerper, FSA, MAAA JHK Company

  2. Purpose • Introduce Gap and Residual Value coverages and the methods of estimating unearned premium reserve for these coverages.

  3. Topics of Discussion • Description of Coverages • Sellers • Underwriters • UEP Reserve for Residual Value • UEP Reserve for Gap

  4. Description of Coverages

  5. Description of Coverages • Excess of loan balance over book value: • Purchase price above book value • Low, zero or negative down payment • Loan amortization vs. vehicle depreciation • Optimistic residual values • After-market extras • Financed insurance coverages

  6. Description of Coverages • Covered Events • Gap - total loss of vehicle (e.g. theft or collision) • Residual Value - maturity of loan

  7. Description of Coverages • Common Additional Benefits - Gap • auto insurance deductible • 1 or 2 delinquent payments • New car purchase bonus

  8. Sellers • Auto dealers • Financing source • Auto insurer

  9. Underwriters • Service Contract or Credit Insurer • Auto Insurer • Bank / Finance Company (Debt Cancellation)

  10. UEP Reserve for Residual Value • No refund value • Timing of losses known • Probability of loss unknown at inception • Base reserve on assumed combined ratio • As business matures, adjust combined ratio assumption

  11. UEP Reserve for Gap • Refund Value (Rule of 78, Pro-Rata) • Other tests

  12. UEP Reserve for Gap • Estimating Exposure for each month

  13. UEP Reserve for Gap • Estimating Exposure for each month - example

  14. UEP Reserve for Gap

  15. UEP Reserve for Gap

  16. UEP Reserve for Gap • Estimating Probability of Loss (frequency) • Experience under existing book of gap contracts • Separate determination of severity (based on exposure) and frequency. • Total loss data from auto insurance statistics

  17. Conclusion • UEP Reserve for Residual Value is a guess at inception and must be adjusted as residual values develop • UEP Reserve for Gap is generally determined by refund value • Other tests can reveal inadequate pricing or longer exposure period

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