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CAS Casualty Loss Reserve Seminar September 13-15, 2004. Reserving for Title Insurance and Residual Value Coverage Alan Hines, FCAS PwC LLP . Overview of Residual Value Coverage. Insured Exposure:
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Reserving for Title Insurance
Residual Value Coverage
Alan Hines, FCAS
Who Purchases Coverage
Competitors in Market
Material Risk Factors
Two Types of Products
- Finance lease accounting – lessor can smooth earnings over the term of the lease
- Operating lease accounting – earnings are realized at the latter part of the lease
PV (Lease payments + guaranteed residual value)
must be > 90% fair value of leased asset at lease inception
- Lessee can use operating lease treatment with off-balance sheet financing that results in delayed expense recognition
Establishing Insured Values
US GAAP Accounting: Insurance or Derivative?
- When the residual value is based on an asset appraisal, or proceeds from a sale exception 10 (e) (2) is met and the contract may be treated as insurance.
- When the residual value is based on reference to an asset valuation guide (Black Book, Blue Book, Green Book) instead of a specific asset appraisal, the contract does not qualify for the 10 (e) (2) exception and must be accounted for as a derivative.
- When based on a combination of a multiple underlyings (ie higher of…), accounting based on contract’s predominant characteristics. Under 10(e) no exception if residual value of other underlyings is highly correlated to guide book!
– Frequency Severity Approach
– Development of Coverage Ratios
– Individual Asset
– Asset Classes
Database of Insured Assets
RE – age, construction, location, use
Probability of Reaching Full Term Not Constant
Probability of Vehicle Being Returned to Lessor
PV Depreciation Data Sources
Modeling Used Vehicle Depreciation
Monthly Depreciation Rates ’00 to ’04 (All Segments)Weighted Average Black Book
PV Underwriting Considerations
Real Estate Depreciation Data Sources
Modeling Real Estate Depreciation