CASUALTY LOSS RESERVE SEMINAR

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CASUALTY LOSS RESERVE SEMINAR
Reserving for Automobile Warranty and Other Long
Duration Contracts New Home Warranty
Presented byPaul J. Struzzieri, FCAS Milliman
USASeptember 24, 2002
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NEW HOME WARRANTY - OUTLINE

• Origins of home warranty
• Description of coverage
• Considerations for reserving
• Financial reporting
• Reserving techniques

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ORIGINS OF HOME WARRANTY

• Early 1970s US proposes 10,000 escrow
• NAHB response insured warranty program
• HOW program formed (1973)
• HOW into receivership (1994)

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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

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CONSIDERATIONS FOR RESERVING - STRUCTURAL

• Soil conditions
• Climate
• Risk management
• Claims handling philosophy

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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

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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

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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

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RESERVING TECHNIQUES
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RESERVING TECHNIQUES
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RESERVING TECHNIQUES
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RESERVING TECHNIQUES
10 Year Structural
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RESERVING TECHNIQUES
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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

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RESERVING TECHNIQUES
10 Year Structural