Casualty loss reserve seminar september 11 2001
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Casualty Loss Reserve Seminar September 11, 2001. Reserving for Construction Defects Presented by Michael D. Green & Carolyn Wettstein. Overview. Background Montrose Decision What is a Construction Defect Program Knowledge Data Organization

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Casualty Loss Reserve Seminar September 11, 2001

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Casualty Loss Reserve SeminarSeptember 11, 2001

Reserving for Construction Defects

Presented by

Michael D. Green & Carolyn Wettstein


Overview

  • Background

  • Montrose Decision

  • What is a Construction Defect

  • Program Knowledge

  • Data Organization

  • Difficulties with Traditional Development Methods

  • Non Traditional Reserving Methods

  • Current Trends

  • What Lies Ahead


Background

Groundwork Being Laid

  • Population growth

  • Building boom

  • Shortage of skilled workers

  • Contractors cutting corners

  • Shift in type of residences


Background

  • Law firms target homeowners associations

  • Insurers begin to react

  • Creates insurance availability and affordability crisis

  • Coverage issues


Montrose Decision

  • Continuous trigger theory applied to pollution case

  • Early construction defect case was Stonewall Insurance Company vs. City of Palos Verdes Estates

  • Carriers respond to claims on prorata basis

    • Frequency rises

    • Severity falls

  • Insureds coverage is generally maximized

  • Reinsurers less exposed

  • Indemnity apportioned based on time on risk

  • Expense apportioned based on number of carriers


Example:$3 Million Claim


What is a Construction Defect?

Comes from a Variety of Sources

  • Faulty workmanship

    • Plumbing / drainage / irrigation

    • Improper materials

    • Structural failure or collapse

    • Electrical wiring

    • Insulation

  • Landslides and Earth Settlement Conditions

    • Expansive soils

    • Underground water

    • Vertical settlement

    • Earthquakes

  • Important to Understand Specific Definitions used by the Company


What is a Construction Defect?

Two Types of Defects

  • Patent

    • Defect detectable through reasonable inspection

    • Statue of limitations generally 2 – 4 years

  • Latent

    • Defect not detectable through reasonable inspection and is manifested over a period of time

    • Time limit governed by statute of repose which begins on the date construction is completed

    • California is generally 10 years


Program Knowledge

  • What is exposure mix (general contractor, designer/builders, subcontractors)

  • Is exposure residential or commercial construction

  • Which states have construction defect exposure

  • Is exposure information available

  • What is the definition of a construction defect claim

  • How is accident date determined

  • What reinsurance agreements are in place


Data Organization

  • California vs. Non California (or other specific states)

  • General Contractors vs. Subcontractors

  • Report year data


Difficulties with Traditional Development Methods

  • Uncertain determination of accident date

    • Varies by company and frequently within a company

  • Uncertain determination of future development pattern

    • Appears to be lengthening

    • Influx of claim activity along recent accident year diagonals

  • Uncertain determination of tail factor selection

    • One assumption to use is no more development after 13 years for California

    • Not sure if it will hold


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Non Traditional Reserving Methods

  • Montrose Adjustment Method

  • Transactional Count / Incremental Paid Loss Method

  • Report Year Analysis (pure IBNR estimated using a selected exposure distribution)


Montrose Adjustment Method


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Report Year Analysis


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Current Trends

  • Frequencies

    • 1994 – 1999 rising

    • 2000 flat

  • Severities

    • 1994 – 1999 stable

    • 2000 flat to declining

  • ALAE to loss ratios

    • Rising over time

    • Recommend monitoring separately from loss as still evolving


What Lies Ahead?

California

  • Housing availability crisis

    • Shortage of skilled workers

    • High real estate prices

    • Population boom

    • Insurance availability crisis

  • Calderon Act (1/96)

    • Mandatory mediation session between association and builder prior to filing lawsuits

    • Appears to have little impact

  • Alan O. Aas vs. Superior Court (12/00)

    • Upheld lower court ruling that plaintiffs could not seek damages for construction defects that had not yet caused property damage


What Lies Ahead?

Other States

  • Areas of rapid increase in population

    • Baby boomers retiring – NV, FL, TX, AZ, CO

    • Seen increase in activity but legal landscape is different

    • Statute of limitations shorter

    • Minimal use of continuous trigger theory

    • Claim frequency is rising


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