CASUALTY LOSS RESERVE SEMINAR Reserving for Automobile Warranty and Other Long Duration Contracts Moderator:Wayne Holdredge Panelists:Grover Edie John Kerper Paul Struzzieri September 11, 2001

1 CASUALTY LOSS RESERVE SEMINAR  NAIC has been studying how to address inadequate premiums for many years  (UPR often much greater than loss reserves)

2 CASUALTY LOSS RESERVE SEMINAR  Definition: Long Duration Contracts  Contracts or policies that fulfill both of the following conditions*:  1.Contract term is greater than or equal to 13 months  2.The insurer can neither cancel the contract, nor increase the  premium during the term  * Exceptions: Financial guaranty contracts mortgage guaranty policies surety contracts

3 CASUALTY LOSS RESERVE SEMINAR  Unearned premiums for each of last three policy years shall be no less than the largest result of the three prescribed tests

4 CASUALTY LOSS RESERVE SEMINAR  For years prior to the three most recent policy years, the tests apply to all years combined

5 CASUALTY LOSS RESERVE SEMINAR  Test 1: (Refundable Amount)  The best estimate of the amounts refundable at the reporting data

6 CASUALTY LOSS RESERVE SEMINAR  Test 2: (Future as portion of total)  Gross premium x (a) where:  (b)  (a)future losses & expenses  (b)total losses & expenses

7 CASUALTY LOSS RESERVE SEMINAR  Test 3: (Discounted future losses)  Future losses and expenses reduced by present value of future premiums

8 CASUALTY LOSS RESERVE SEMINAR  Some applicable coverages auto warranties (service contracts) home warranties credit related coverages (term of lease/loan)  GAP  residual value  credit property  involuntary unemployment many more