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Casualty Loss Reserve Seminar September 11, 2001

Casualty Loss Reserve Seminar September 11, 2001. Reserving for Construction Defects Presented by Michael D. Green & Carolyn Wettstein. Overview. Background Montrose Decision What is a Construction Defect Program Knowledge Data Organization

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Casualty Loss Reserve Seminar September 11, 2001

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  1. Casualty Loss Reserve SeminarSeptember 11, 2001 Reserving for Construction Defects Presented by Michael D. Green & Carolyn Wettstein

  2. Overview • Background • Montrose Decision • What is a Construction Defect • Program Knowledge • Data Organization • Difficulties with Traditional Development Methods • Non Traditional Reserving Methods • Current Trends • What Lies Ahead

  3. Background Groundwork Being Laid • Population growth • Building boom • Shortage of skilled workers • Contractors cutting corners • Shift in type of residences

  4. Background • Law firms target homeowners associations • Insurers begin to react • Creates insurance availability and affordability crisis • Coverage issues

  5. Montrose Decision • Continuous trigger theory applied to pollution case • Early construction defect case was Stonewall Insurance Company vs. City of Palos Verdes Estates • Carriers respond to claims on prorata basis • Frequency rises • Severity falls • Insureds coverage is generally maximized • Reinsurers less exposed • Indemnity apportioned based on time on risk • Expense apportioned based on number of carriers

  6. Example:$3 Million Claim

  7. What is a Construction Defect? Comes from a Variety of Sources • Faulty workmanship • Plumbing / drainage / irrigation • Improper materials • Structural failure or collapse • Electrical wiring • Insulation • Landslides and Earth Settlement Conditions • Expansive soils • Underground water • Vertical settlement • Earthquakes • Important to Understand Specific Definitions used by the Company

  8. What is a Construction Defect? Two Types of Defects • Patent • Defect detectable through reasonable inspection • Statue of limitations generally 2 – 4 years • Latent • Defect not detectable through reasonable inspection and is manifested over a period of time • Time limit governed by statute of repose which begins on the date construction is completed • California is generally 10 years

  9. Program Knowledge • What is exposure mix (general contractor, designer/builders, subcontractors) • Is exposure residential or commercial construction • Which states have construction defect exposure • Is exposure information available • What is the definition of a construction defect claim • How is accident date determined • What reinsurance agreements are in place

  10. Data Organization • California vs. Non California (or other specific states) • General Contractors vs. Subcontractors • Report year data

  11. Difficulties with Traditional Development Methods • Uncertain determination of accident date • Varies by company and frequently within a company • Uncertain determination of future development pattern • Appears to be lengthening • Influx of claim activity along recent accident year diagonals • Uncertain determination of tail factor selection • One assumption to use is no more development after 13 years for California • Not sure if it will hold

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  13. Non Traditional Reserving Methods • Montrose Adjustment Method • Transactional Count / Incremental Paid Loss Method • Report Year Analysis (pure IBNR estimated using a selected exposure distribution)

  14. Montrose Adjustment Method

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  19. Report Year Analysis

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  25. Current Trends • Frequencies • 1994 – 1999 rising • 2000 flat • Severities • 1994 – 1999 stable • 2000 flat to declining • ALAE to loss ratios • Rising over time • Recommend monitoring separately from loss as still evolving

  26. What Lies Ahead? California • Housing availability crisis • Shortage of skilled workers • High real estate prices • Population boom • Insurance availability crisis • Calderon Act (1/96) • Mandatory mediation session between association and builder prior to filing lawsuits • Appears to have little impact • Alan O. Aas vs. Superior Court (12/00) • Upheld lower court ruling that plaintiffs could not seek damages for construction defects that had not yet caused property damage

  27. What Lies Ahead? Other States • Areas of rapid increase in population • Baby boomers retiring – NV, FL, TX, AZ, CO • Seen increase in activity but legal landscape is different • Statute of limitations shorter • Minimal use of continuous trigger theory • Claim frequency is rising

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