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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

Casualty Loss Reserve SeminarSeptember 11, 2001

Reserving for Construction Defects

Presented by

Michael D. Green & Carolyn Wettstein

overview
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
Background

Groundwork Being Laid

  • Population growth
  • Building boom
  • Shortage of skilled workers
  • Contractors cutting corners
  • Shift in type of residences
background4
Background
  • Law firms target homeowners associations
  • Insurers begin to react
  • Creates insurance availability and affordability crisis
  • Coverage issues
montrose decision
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
what is a construction defect
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 defect8
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
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
Data Organization
  • California vs. Non California (or other specific states)
  • General Contractors vs. Subcontractors
  • Report year data
difficulties with traditional development methods
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
non traditional reserving methods
Non Traditional Reserving Methods
  • Montrose Adjustment Method
  • Transactional Count / Incremental Paid Loss Method
  • Report Year Analysis (pure IBNR estimated using a selected exposure distribution)
current trends
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
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 ahead27
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