Contingent Liability Risk Retention Groups for Automobile Warranty Companies - PowerPoint PPT Presentation

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Contingent Liability Risk Retention Groups for Automobile Warranty Companies

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Title: Contingent Liability Risk Retention Groups for Automobile Warranty Companies


1
Contingent Liability Risk Retention Groups for
Automobile Warranty Companies
  • Mark J. Sobel, FCAS, MAAA
  • Financial Risk Analysts, LLC

2
Contingent Liability Risk Retention Groups for
Automobile Warranty Companies
  • Overview of Auto Warranty Coverage
  • Nature of Contingent Liability Coverage
  • Representative Policy Language
  • Loss Reserve and Accounting Issues

3
  • Automobile Warranty Companies
  • Provide extended service contracts (ESCs) for
    new and used vehicles
  • Contracts vary by term and/or mileage
  • Not regulated as insurance companies
  • Majority of states require an insurance product

4
  • Automobile Warranty Companies
  • Loss Reserving Issues
  • --Issue Long Duration Contracts
  • --Earnings Curves
  • --Liability Matching

5
  • Insuring Agreement 1
  • Upon failure of the insured to perform under
    the service contracts, XYZ Risk Retention Group,
    Inc. shall pay on behalf of the insured any sums
    the insured is legally obligated to pay or shall
    provide the service that the insured is legally
    obligated to perform according to the insureds
    contractual obligation under the service
    contracts issued by the insured.
  • Coverage hereunder shall be provided on a
    claims made basis.

6
  • Insuring Agreement 1 (cont.)
  • Termination of this policy shall not affect or
    reduce the Companys obligations to, or
    responsibility for, direct coverage to service
    contract holders whose service contracts were
    made during the term of this policy and were
    covered under this policy.

7
  • Policy Amendatory Endorsement 1
  • It is hereby agreed that in the event the
    Insured is no longer in business, for whatever
    reason, the Company will provide directly to the
    Service Contract Holder all benefits to which the
    Service Contract Holder is entitled under the
    terms of the Service Contract.
  • All other terms and conditions of said Policy
    remain unchanged.

8
  • Policy Language 2
  • This contractual liability policy is written
    on a claims made and reported basis and provides
    coverage for those claims that are first made and
    reported to the company in writing while this
    insurance is in force and which are the result of
    claims occurring subsequent to the retroactive
    date specified. No coverage exists for claims
    first made after the end of the policy period
    unless and to the extent that an extended
    reporting period applies.

9
  • Insuring Agreement 2
  • The Company hereby agrees to pay to or on
    behalf of the Policyholder all sums which the
    Policyholder shall become legally obligated to
    pay as claims under Vehicle Service Contracts
    issued by the Policyholder.
  • Coverage shall apply only to Claims first
    reported to the Company during the policy period
    provided that such claims resulted from Vehicle
    Service Contracts sold on or subsequent to the
    retroactive date specified in the declarations.

10
  • Policy Amendatory Endorsement 2
  • It is hereby agreed that in the event the
    Policyholder is no longer in business, for
    whatever reason, the Company will provide
    directly to the Service Contract Holder all
    benefits to which the Service Contract Holder is
    entitled under the terms of the Service Contract.
  • Nothing herein contained shall be held to
    vary, waive, alter, or extend any of the terms,
    conditions, agreements or declarations of the
    policy, other than as stated herein. This is a
    claims made and reported policy and therefore any
    rights or benefits afforded the Service Contract
    Holder under this endorsement shall be limited to
    the claims made coverage afforded the
    Policyholder under this Contractual Liability
    Policy.

11
  • RRG Loss Reserving Issues
  • Definition of loss occurrence
  • (occurrence or claims made?)
  • Date of loss
  • Loss trigger
  • Surplus/deficit of warranty company

12
  • RRG Loss Reserve Approaches
  • Zero loss reserves
  • Loss reserve equal to deficit
  • Loss reserve equal to deferred revenue
  • Target loss ratio

13
  • Other RRG Reserve Issues
  • Loss reserve opinion-variability, materiality
  • Unearned premium reserve opinion
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