CASUALTY LOSS RESERVE SEMINAR Reserving for Automobile Warranty and Other Long Duration Contracts New Home Warranty Presented by: Paul J. Struzzieri, FCAS Milliman USA September 24, 2002

NEW HOME WARRANTY - OUTLINE Origins of home warranty Description of coverage Considerations for reserving Financial reporting Reserving techniques

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)

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

CONSIDERATIONS FOR RESERVING - STRUCTURAL Soil conditions Climate Risk management Claims handling philosophy

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

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

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

RESERVING TECHNIQUES

RESERVING TECHNIQUES

RESERVING TECHNIQUES

RESERVING TECHNIQUES 10 Year Structural

RESERVING TECHNIQUES

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

RESERVING TECHNIQUES 10 Year Structural