1 LONG DURATION POLICIES Presented by Grover M. Edie, FCAS, MAAA CLRS San Diego, CA September 10-11, 2007

2 Service Contracts & Related Coverages Introduction A bit about earnings factors Cancellations effect on earned premium What can go wrong - multiple types What can go wrong – vehicle ESC’s What can go wrong – other coverages

3 Service Contracts & Related Coverages Considerations for All Types – Earnings Factors Not uniform over life of contract –back loaded –front loaded –or what? When will your contracts first be exposed? When will you have sufficient data to be able to set your own earnings factors? What are my options?

4 Typical Six-Month P/C Policy Earnings are Even Throughout the Period

5 Service Contracts & Related Coverages Earnings are “Back Loaded”

6 Service Contracts & Related Coverages Earnings are “Front Loaded”

7 Service Contracts & Related Coverages Earnings do not Match Loss Emergence

8 Service Contracts & Related Coverages Estimating Loss Reserves Claims settle quickly –Do they vary by distribution channel? –If so, does it matter? Are claims seasonal? –Does it matter if they are?

9 Long Duration Contracts Considerations for All Types Assumptions regarding other providers’ prices In business to make money, or other purposes? Expert or naive (if to make money, are they?) –Don’t assume “Big” is “Profitable” Do they pay claims the same way you will? –Maintenance proof requirement –Wear and tear exclusions

10 Service Contracts & Related Coverages Considerations for All Types - General Sold at purchase only or any time during OEM warranty period? “Free look” period (purchaser can cancel flat within x days without penalty) Purchased by customer, or “thrown in for free?” Promotions, etc. Different underlying OEM warranties, and what to do when they change

11 Service Contracts & Related Coverages Considerations for All Types - Pricing Few and wide classifications –Not as refined as other products –Usually no classification by user Is product bought by consumer, or sold by retailer? (pull versus push)

12 Service Contracts & Related Coverages Other Considerations Commercial or personal Retirees versus youthful driver – cars or motorcycles or whatever Geographic region – Vehicle AC losses in the south versus the north Coastal salt spray and its affect on vehicles By state – condition of roads, ability to use off- road and types of off-road use (motorcycle, snowmobile, ATV, etc.)

13 Service Contracts & Related Coverages Vehicle Extended Service Contracts OEM parts or other? Where repaired? Anywhere, or only authorized dealers, service centers? What labor rate? What time estimate used to bill for labor? –Manufacturer warranty time –Private company estimated time to repair

14 Service Contracts & Related Coverages Vehicle Extended Service Contracts (continued) Variation in driving patterns, road conditions, speed limits, etc. by country Maintenance habits by country Consequential damage – covered? Hybrid vehicles E85 vehicles “Content creep”

15 Service Contracts & Related Coverages Vehicle Extended Service Contracts (continued) Changes in vehicle reliability –Is first model year reliability any different? –Is “new vehicle” really a new vehicle? –Is last year of production any different? –Even if so, should you price differently by model year for these effects? Modular component construction Electrical cluster

16 Service Contracts & Related Coverages Guaranteed Asset Protection (GAP) Loan to value Zero percent financing – still need GAP? Annual miles driven Driver demographics Contract terms Are vehicle prices regional?

17 Service Contracts & Related Coverages GAP (continued) Changes in vehicle value affecting GAP –Gas prices up, SUV values down? –Gas prices up, small car values up? Payments by personal auto insurer When brands disappear (Plymouth, Oldsmobile)

18 Service Contracts & Related Coverages Scheduled Maintenance Coverage “Change Oil” indicator Synthetic oils Cover HEPA filter? Other misc. items? Cover anywhere or only at selling dealer?

19 Service Contracts & Related Coverages Questions and Discussion