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Surety . Loss Reserving Issues. Joseph Malsky, ACAS St. Paul Companies. Agenda. What drives surety losses? Unique reserving aspects of surety? Reserving techniques and considerations?. Overview . Surety is not like insurance A surety extends credit much like banks do. Underwriting.

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Presentation Transcript
surety

Surety

Loss Reserving Issues

Joseph Malsky, ACASSt. Paul Companies

Casualty Loss Reserve Seminar

agenda
Agenda
  • What drives surety losses?
  • Unique reserving aspects of surety?
  • Reserving techniques and considerations?

CLRS 2

overview
Overview
  • Surety is not like insurance
  • A surety extends credit much like banks do

Underwriting

Construction Spending

Economy

Obligee

Surety

Principal

Contract Money

Collateral

Defaults

CLRS 3

surety loss trends
Surety Loss Trends
  • Economy key driver of surety results
  • 1990’s fantastic decade for surety industry
  • Contract Surety v. Commercial Surety

CLRS 4

economic trends
Economic Trends

Source: U.S. Department of Labor; Federal Reserve Board Release; Bureau of Economic Analysis, AM Best

CLRS 5

public construction spending v surety industry c r
Public Construction Spending v. Surety Industry C/R

Source: AM Best’s Aggregates & Averages; U.S. Census Bureau.

CLRS 6

contractor failure rates liabilities
Contractor Failure Rates & Liabilities

Source: Dunn and Bradstreet Business Failure Record

CLRS 7

selection of actuarial reserving methods
Selection of Actuarial Reserving Methods
  • Selection will vary with
    • Size of company
    • Available data
    • Nature of surety business
  • Considerations influencing selection of method
    • Analysis of controls and reporting
    • Handling of contract monies
    • Peculiar Large Claims
    • Recoveries
    • External influences

CLRS 8

unique reserving issues
Unique Reserving Issues
  • Surety in theory priced and underwritten to be loss free
  • Accident Date
  • Collateral & Salvage
  • ALAE reserving

CLRS 9

accident date
Accident Date
  • How to define for contract surety? When was the default on the bond?
  • What if the notice of loss is outside the bond period?
  • Should it be consistent for all claims/bonds for a principal?

CLRS 10

collateral salvage
Collateral & Salvage
  • Evaluation for open known claims generally different than for IBNR claims
  • Types of Collateral:
    • Contract Money
    • LOC’s
    • Indemnity
    • Project Shares
    • Mortgages

CLRS 11

summary
Summary
  • Surety losses are not fortuitous, but are sensitive to the economy
  • Collateral and Salvage play a big role in reserve analyses
  • Understand your underlying data and mix of business
  • Know your underwriters and claim attorneys

CLRS 15

future study
Future Study
  • Loss development analysis based on credit ratings for commercial surety?
  • Application of loss distributions?
  • Cat reserving techniques?
  • Can PML and default rate studies benefit reserve analyses?

CLRS 16

where to get more information
Where to Get More Information
  • SAA and SIO
  • NASBP seminars
  • Principles of Suretyship, by Fitzgerald, et.al.
  • Surety Rate-Making, by Backman

CLRS 17