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LONG DURATION POLICIES

LONG DURATION POLICIES. Presented by Grover M. Edie, FCAS, MAAA CLRS San Diego, CA September 10-11, 2007. Service Contracts & Related Coverages. Introduction A bit about earnings factors Cancellations effect on earned premium What can go wrong - multiple types

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LONG DURATION POLICIES

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  1. LONG DURATION POLICIES Presented by Grover M. Edie, FCAS, MAAA CLRS San Diego, CA September 10-11, 2007

  2. Service Contracts & Related Coverages • Introduction • A bit about earnings factors • Cancellations effect on earned premium • What can go wrong - multiple types • What can go wrong – vehicle ESC’s • What can go wrong – other coverages

  3. Service Contracts & Related CoveragesConsiderations for All Types – Earnings Factors • Not uniform over life of contract • back loaded • front loaded • or what? • When will your contracts first be exposed? • When will you have sufficient data to be able to set your own earnings factors? • What are my options?

  4. Typical Six-Month P/C PolicyEarnings are Even Throughout the Period

  5. Service Contracts & Related Coverages Earnings are “Back Loaded”

  6. Service Contracts & Related Coverages Earnings are “Front Loaded”

  7. Service Contracts & Related Coverages Earnings do not Match Loss Emergence

  8. Service Contracts & Related CoveragesEstimating Loss Reserves • Claims settle quickly • Do they vary by distribution channel? • If so, does it matter? • Are claims seasonal? • Does it matter if they are?

  9. Long Duration ContractsConsiderations for All Types Assumptions regarding other providers’ prices • In business to make money, or other purposes? • Expert or naive (if to make money, are they?) • Don’t assume “Big” is “Profitable” • Do they pay claims the same way you will? • Maintenance proof requirement • Wear and tear exclusions

  10. Service Contracts & Related CoveragesConsiderations for All Types - General • Sold at purchase only or any time during OEM warranty period? • “Free look” period (purchaser can cancel flat within x days without penalty) • Purchased by customer, or “thrown in for free?” Promotions, etc. • Different underlying OEM warranties, and what to do when they change

  11. Service Contracts & Related CoveragesConsiderations for All Types - Pricing • Few and wide classifications • Not as refined as other products • Usually no classification by user • Is product bought by consumer, or sold by retailer? (pull versus push)

  12. Service Contracts & Related CoveragesOther Considerations • Commercial or personal • Retirees versus youthful driver – cars or motorcycles or whatever • Geographic region – Vehicle AC losses in the south versus the north • Coastal salt spray and its affect on vehicles • By state – condition of roads, ability to use off-road and types of off-road use (motorcycle, snowmobile, ATV, etc.)

  13. Service Contracts & Related CoveragesVehicle Extended Service Contracts • OEM parts or other? • Where repaired? Anywhere, or only authorized dealers, service centers? • What labor rate? • What time estimate used to bill for labor? • Manufacturer warranty time • Private company estimated time to repair

  14. Service Contracts & Related CoveragesVehicle Extended Service Contracts (continued) • Variation in driving patterns, road conditions, speed limits, etc. by country • Maintenance habits by country • Consequential damage – covered? • Hybrid vehicles • E85 vehicles • “Content creep”

  15. Service Contracts & Related CoveragesVehicle Extended Service Contracts (continued) • Changes in vehicle reliability • Is first model year reliability any different? • Is “new vehicle” really a new vehicle? • Is last year of production any different? • Even if so, should you price differently by model year for these effects? • Modular component construction • Electrical cluster

  16. Service Contracts & Related CoveragesGuaranteed Asset Protection (GAP) • Loan to value • Zero percent financing – still need GAP? • Annual miles driven • Driver demographics • Contract terms • Are vehicle prices regional?

  17. Service Contracts & Related CoveragesGAP (continued) • Changes in vehicle value affecting GAP • Gas prices up, SUV values down? • Gas prices up, small car values up? • Payments by personal auto insurer • When brands disappear (Plymouth, Oldsmobile)

  18. Service Contracts & Related CoveragesScheduled Maintenance Coverage • “Change Oil” indicator • Synthetic oils • Cover HEPA filter? Other misc. items? • Cover anywhere or only at selling dealer?

  19. Service Contracts & Related Coverages Questions and Discussion

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