Reserving for Automobile Warranty and Other Long Duration Contracts

1. Reserving for Automobile Warranty and Other Long Duration Contracts Auto Warranties and Auto Extended Service Contracts Grover Edie GMAC Insurance

2. Reserving for Automobile Warranty and Other Long Duration Contracts • Earnings patterns are jealously guarded by ESC writers (also, no “bureau” for data) • Earnings patterns in this paper 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.

3. 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

4. Auto Warranties and Auto Extended Service Contracts Problems: • Earnings over several calendar years • Exposure does not earn evenly over the coverage period • Some contracts have more than one earnings path (example: time AND mileage) • Catastrophes CAN happen (“spills”)

5. 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)

6. Auto Warranties and Auto Extended Service Contracts Very Important! • For warranty coverage, 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

7. 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 are misleading, at best

8. Auto Warranties and Auto Extended Service Contracts Data Elements (Pure Premium, etc.) 0 12 24 36 48 60 Time in service or since contract inception

9. Data Element (Pure Prem, Freq, Etc.) Time since in-service date or contract inception

15. 120 100 80 Kilometers (000) 60 40 Manufacturer’s Warranty 20 12 24 36 48 60 72 Months 72 month/100 Km ESC Plan

16. Example of ESC Earning Pattern

17. Example of ESC Earning Pattern

18. Example of ESC Earning Pattern

19. Example of ESC Earning Pattern

20. Example of ESC Earning Pattern

21. Example of ESC Earning Pattern

22. Example of ESC Earning Pattern - Steady State

23. Example of ESC Earning Pattern - Steady State

24. Example of ESC Earning Pattern - Steady State

25. Example of ESC Earning Pattern - Steady State

26. Example of ESC Earning Pattern - Steady State

27. Example of ESC Earning Pattern - Steady State

28. Example of ESC Earning Pattern - Steady State

29. Example of ESC Earning Pattern - Steady State

30. Example of ESC Earning Pattern - Steady State

31. Example of ESC Earning Pattern - Steady State

32. Example of ESC Earning Pattern - Steady State

33. Example of ESC Earning Pattern - Steady State