1. Contingent Liability Risk Retention Groups for Automobile Warranty Companies Mark J. Sobel, FCAS, MAAA Financial Risk Analysts, LLC

2. Contingent Liability Risk Retention Groups for Automobile Warranty Companies Overview of Auto Warranty Coverage Nature of Contingent Liability Coverage Representative Policy Language Loss Reserve and Accounting Issues

3. Financial Risk Analysts, LLC Automobile Warranty Companies Provide extended service contracts (ESC’s) for new and used vehicles Contracts vary by term and/or mileage Not regulated as insurance companies Majority of states require an insurance product

4. Financial Risk Analysts, LLC Automobile Warranty Companies Loss Reserving Issues— --Issue Long Duration Contracts --Earnings Curves --Liability Matching

5. Financial Risk Analysts, LLC Insuring Agreement #1 Upon failure of the insured to perform under the service contracts, XYZ Risk Retention Group, Inc. shall pay on behalf of the insured any sums the insured is legally obligated to pay or shall provide the service that the insured is legally obligated to perform according to the insured’s contractual obligation under the service contracts issued by the insured. Coverage hereunder shall be provided on a claims made basis.

6. Insuring Agreement #1 (cont.) Termination of this policy shall not affect or reduce the Company’s obligations to, or responsibility for, direct coverage to service contract holders whose service contracts were made during the term of this policy and were covered under this policy.

7. Financial Risk Analysts, LLC Policy Amendatory Endorsement #1 It is hereby agreed that in the event the Insured is no longer in business, for whatever reason, the Company will provide directly to the Service Contract Holder all benefits to which the Service Contract Holder is entitled under the terms of the Service Contract. All other terms and conditions of said Policy remain unchanged.

8. Policy Language #2 This contractual liability policy is written on a claims made and reported basis and provides coverage for those claims that are first made and reported to the company in writing while this insurance is in force and which are the result of claims occurring subsequent to the retroactive date specified. No coverage exists for claims first made after the end of the policy period unless and to the extent that an extended reporting period applies.

9. Financial Risk Analysts, LLC Insuring Agreement #2 The Company hereby agrees to pay to or on behalf of the Policyholder all sums which the Policyholder shall become legally obligated to pay as claims under Vehicle Service Contracts issued by the Policyholder. Coverage shall apply only to Claims first reported to the Company during the policy period provided that such claims resulted from Vehicle Service Contracts sold on or subsequent to the retroactive date specified in the declarations.

10. Financial Risk Analysts, LLC Policy Amendatory Endorsement #2 It is hereby agreed that in the event the Policyholder is no longer in business, for whatever reason, the Company will provide directly to the Service Contract Holder all benefits to which the Service Contract Holder is entitled under the terms of the Service Contract. Nothing herein contained shall be held to vary, waive, alter, or extend any of the terms, conditions, agreements or declarations of the policy, other than as stated herein. This is a claims made and reported policy and therefore any rights or benefits afforded the Service Contract Holder under this endorsement shall be limited to the claims made coverage afforded the Policyholder under this Contractual Liability Policy.

11. Financial Risk Analysts, LLC RRG Loss Reserving Issues  Definition of loss occurrence (occurrence or claims made?)  Date of loss  Loss trigger  Surplus/deficit of warranty company

12. Financial Risk Analysts, LLC RRG Loss Reserve Approaches  Zero loss reserves  Loss reserve equal to deficit  Loss reserve equal to deferred revenue  Target loss ratio

13. Financial Risk Analysts, LLC Other RRG Reserve Issues  Loss reserve opinion-variability, materiality  Unearned premium reserve opinion