John Kerper and Lee Bowron presented at the VSCAC conference in Las Vegas on September 18, 2007. The topic was how to analyze vehicle service contract experience. You can download the presentation by clicking on the link above.
In March 2007, we gave a presentation at the CAS Ratemaking Seminar on these techniques. A copy of the presentation can be found here.
Existing actuarial techniques for automobile warranty ratemaking and reserving rely heavily on emerging experience (loss development) for the pricing and unearned premium reserving of these products.Since terms for automobile warranties can extend up to 10 years, such data is typically not available or not credible to the degree that the actuary can take great reliance on it.In addition, changing coverage terms in the auto warranty products can often make past development even less meaningful.Exposure techniques that have been developed (Cheng, 1993) rely on overall averages for some critical assumptions instead of distributions or individual policy characteristics. We propose a “miles-driven” approach in which claims are assumed to arise from auto warranties in proportion to the miles driven times a weight assigned to the overall mileage of the vehicle.The method we employ is much more complex than traditional methods, but relies on data that is typically available at warranty writers.Important data elements would include the mileage of the vehicle at the time of a claim and if the contract cancels.In addition, the underlying manufacturer’s warranty is also critical.
In order to provide an accurate model of pricing, a distributional approach is utilized for each policy to model the different driving habits of the policyholders.For example, claim costs can be developed using 5 different driving habits for each policy.
Such a method is very useful for the pricing and premium reserving of new coverages or at start-up companies. The method proposed utilizes “policy-event based loss estimation methodology” in which a predicted claim cost is derived from each warranty individually.
Articles written by John Kerper:
Reserving for Automobile Warranty and Other Long Duration Contracts (Session at 2002 CLRS)-Unearned premium reserves for long duration contracts can be substantial liabilities on the financial statements for many property and liability insurance companies. This session will investigate reserving techniques and philosophies for unearned premium reserves for automobile warranty and other long-term policies. In addition, the session will facilitate a discussion around unused coverages or circumstances, not strictly contemplated by the drafters of current statutory rules.
Moderator:
Wayne D. Holdredge, Principal, Tillinghast-Towers Perrin
Panelists:
Grover M. Edie, Vice President and Chief Actuary, GMAC Insurance
John H. Kerper, President, JHK Company
Paul J. Struzzieri, Consulting Actuary, Milliman USA
Managing Non-Life Insured Products Sold Through Auto Dealers-Excerpt: Auto Dealers offer several insurance and insured products through their finance and insurance (F&I) departments other than credit life and credit A&H. Vehicle service contracts, gap and financing are three other products offered by the F&I department that are often insured by property & casualty insurers. We will examine each of these products separately in a three-part series.
"Zipf's Law," appears in the January 2004 issue of Contingencies. Zipf's Law is an interesting power-law phenomenon that has interesting applications to many aspects of life, including market share.
"Staying in the Race," - appears in Best's Review, December 2001-For Property Casualty insurance, "Business Retention" has always taken a back seat to its sexy cousin, "New Business Production." However, companies and agencies are increasingly analyzing retention and focusing on improving it. Even small improvements in retention can make large improvements to profitability levels.
Ratemaking For Maximum Profitability- appears in the 2001 Winter Forum Ratemaking Discussion Papers-The goal of ratemaking methodologies is to estimate the future expected costs for a book of business. However, if one looks at the rate activity in a market, it is apparent that company actions do not always follow the indications. Suprisingly, such decisions often lead to successful results. It seems that there must be something going on that is invisible to the naked eye? Do indications really mean so little? Or are there other factors, buried data that is difficult to quantify?
