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Reserving for Automobile Warranty and Other Long Duration Contracts

This presentation explores the reserving process for automobile warranties and other long duration contracts, including earnings patterns, accrual estimates, losses, and data elements.

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Reserving for Automobile Warranty and Other Long Duration Contracts

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  1. Reserving for Automobile Warranty and Other Long Duration Contracts Auto Warranties And Auto Extended Service Contracts Grover Edie

  2. Reserving for Automobile Warranty and Other Long Duration Contracts • Earnings patterns are closely guarded by ESC writers (also, no “bureau” for data) • Earnings patterns in this presentation are purely fictitious - any semblance to actual earnings patterns is accidental • Earnings patterns vary considerably due to variations in coverage, vehicle, deductible, time/mileage limits, etc.

  3. Reserving for Automobile Warranty and Other Long Duration Contracts • New Car Manufacturer Warranties • ESC Sold when new car placed into service • “Extended Eligibility” new vehicle ESC’s • Used Vehicle ESC’s

  4. Auto Warranties and Auto Extended Service Contracts Problems: • Earnings occur over several calendar years • Exposure does not earn evenly over those calendar years • Some contracts have more than one earnings path (example: time AND mileage)

  5. Auto Warranties and Auto Extended Service Contracts Good news / Bad News: • Vehicles are sold with no practical means of revising their warranties, other than to expand the coverage • ESC Sales are essentially “one shot,” there are no renewals (rate changes do not affect current book of business)

  6. Auto Warranties and Auto Extended Service Contracts Warranty Accruals or ESC considerations • For warranty accrual estimates, talk to the engineers, if you can • Talk with the people that price the ESC product • Talk with the people who market the ESC product to understand any shifts in distribution, new programs, etc. • Vehicle “Content” can change over time

  7. Auto Warranties and Auto Extended Service Contracts Losses • Often, there are no case reserves, only payments • Earned premium is not proportional to time, so loss ratio methods can be misleading • Catastrophes CAN happen (“spills”)

  8. Auto Warranties and Auto Extended Service Contracts Data Elements (Pure Premium, etc.) 0 12 24 36 48 60 Time in service or since contract inception

  9. Vehicle Manufacturer’s Warranties

  10. Auto Extended Service Contracts(or “Extended Warranties”)

  11. Example of ESC Earning Pattern

  12. Example of ESC Earning Pattern

  13. Example of ESC Earning Pattern

  14. Example of ESC Earning Pattern

  15. Example of ESC Earning Pattern

  16. Example of ESC Earning Pattern

  17. Example of ESC Earning Pattern

  18. Example of ESC Earning Pattern - Steady State

  19. Example of ESC Earning Pattern - Steady State

  20. Example of ESC Earning Pattern - Steady State

  21. Example of ESC Earning Pattern - Steady State

  22. Example of ESC Earning Pattern - Steady State

  23. Example of ESC Earning Pattern - Steady State

  24. Example of ESC Earning PatternStop at End of Year 8

  25. Example of ESC Earning Pattern - Steady State

  26. Example of ESC Earning Pattern - Steady State

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