1. 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

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

3. 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)

4. 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

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

6. 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

7. 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

8. 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

9. RESERVING TECHNIQUES

10. RESERVING TECHNIQUES

11. RESERVING TECHNIQUES

12. RESERVING TECHNIQUES
10 Year Structural

13. RESERVING TECHNIQUES

14. 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

15. RESERVING TECHNIQUES
10 Year Structural