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John Kerper, FSA, MAAA JHK Company

Reserving for Automobile Warranty and Other Long Duration Contracts Gap & Residual Value 2002 Casualty Loss Reserve Seminar - Session 7. John Kerper, FSA, MAAA JHK Company. Purpose.

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John Kerper, FSA, MAAA JHK Company

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  1. Reserving for Automobile Warranty and Other Long Duration ContractsGap & Residual Value2002 Casualty Loss Reserve Seminar - Session 7 John Kerper, FSA, MAAA JHK Company

  2. Purpose • Introduce Gap and Residual Value coverages and the methods of estimating unearned premium reserve for these coverages.

  3. Topics of Discussion • Description of Coverages • Sellers • Underwriters • UEP Reserve for Residual Value • UEP Reserve for Gap

  4. Description of Coverages

  5. Description of Coverages • Excess of loan balance over book value: • Purchase price above book value • Low, zero or negative down payment • Loan amortization vs. vehicle depreciation • Optimistic residual values • After-market extras • Financed insurance coverages

  6. Description of Coverages • Covered Events • Gap - total loss of vehicle (e.g. theft or collision) • Residual Value - maturity of loan

  7. Description of Coverages • Common Additional Benefits - Gap • auto insurance deductible • 1 or 2 delinquent payments • New car purchase bonus

  8. Sellers • Auto dealers • Financing source • Auto insurer

  9. Underwriters • Service Contract or Credit Insurer • Auto Insurer • Bank / Finance Company (Debt Cancellation)

  10. UEP Reserve for Residual Value • No refund value • Timing of losses known • Probability of loss unknown at inception • Base reserve on assumed combined ratio • As business matures, adjust combined ratio assumption

  11. UEP Reserve for Gap • Refund Value (Rule of 78, Pro-Rata) • Other tests

  12. UEP Reserve for Gap • Estimating Exposure for each month

  13. UEP Reserve for Gap • Estimating Exposure for each month - example

  14. UEP Reserve for Gap

  15. UEP Reserve for Gap

  16. UEP Reserve for Gap • Estimating Probability of Loss (frequency) • Experience under existing book of gap contracts • Separate determination of severity (based on exposure) and frequency. • Total loss data from auto insurance statistics

  17. Conclusion • UEP Reserve for Residual Value is a guess at inception and must be adjusted as residual values develop • UEP Reserve for Gap is generally determined by refund value • Other tests can reveal inadequate pricing or longer exposure period

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