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Published byJonah Garrison Modified over 9 years ago
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Reserving for Automobile Warranty and Other Long Duration Contracts Auto Warranties And Auto Extended Service Contracts Grover Edie
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Reserving for Automobile Warranty and Other Long Duration Contracts Earnings patterns are closely guarded by ESC writers (also, no “bureau” for data) Earnings patterns in this presentation are purely fictitious - any semblance to actual earnings patterns is accidental Earnings patterns vary considerably due to variations in coverage, vehicle, deductible, time/mileage limits, etc.
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Reserving for Automobile Warranty and Other Long Duration Contracts New Car Manufacturer Warranties ESC Sold when new car placed into service “Extended Eligibility” new vehicle ESC’s Used Vehicle ESC’s
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Auto Warranties and Auto Extended Service Contracts Problems: Earnings occur over several calendar years Exposure does not earn evenly over those calendar years Some contracts have more than one earnings path (example: time AND mileage)
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Auto Warranties and Auto Extended Service Contracts Good news / Bad News: Vehicles are sold with no practical means of revising their warranties, other than to expand the coverage ESC Sales are essentially “one shot,” there are no renewals (rate changes do not affect current book of business)
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Auto Warranties and Auto Extended Service Contracts Warranty Accruals or ESC considerations For warranty accrual estimates, talk to the engineers, if you can Talk with the people that price the ESC product Talk with the people who market the ESC product to understand any shifts in distribution, new programs, etc. Vehicle “Content” can change over time
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Auto Warranties and Auto Extended Service Contracts Losses Often, there are no case reserves, only payments Earned premium is not proportional to time, so loss ratio methods can be misleading Catastrophes CAN happen (“spills”)
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Auto Warranties and Auto Extended Service Contracts Time in service or since contract inception Data Elements (Pure Premium, etc.) 012 24 36 4860
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Vehicle Manufacturer’s Warranties
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Auto Extended Service Contracts (or “Extended Warranties”)
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Example of ESC Earning Pattern
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Example of ESC Earning Pattern - Steady State
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Example of ESC Earning Pattern Stop at End of Year 8
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Example of ESC Earning Pattern - Steady State
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