Kerper and Bowron LLC

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Earnings Curves: The Past, Present and Future

April 16, 2014

For vehicle service contracts (VSCs), the earnings curve is a critical tool for financial reporting and experience evaluation. Typically, the earnings curve is a set of factors by month, which show how much of a contract should be earned.

When a company evaluates its financial results at the end of the year, each active contract will be aged from the months since purchase and the premium or reserve for that contract will be multiplied by this factor to calculate the earned reserve. For example, if the reserve on a contract is $400 and it is 12 months since purchase, the system will look up the factor for 12 months. If the factor is 20%, then $80 is earned and $320 is unearned.

It is important to realize that no earnings curve is perfect. It is always an estimate. Only in retrospect, by examining the claim pattern, will the true earnings pattern be known.

In the past, it was common to earn using a formula. Typical formulas were pro-rata (even earnings for each month) for used cars and Reverse-Rule-of-78s for new cars.

 

http://pa-magazine.com/actuary/earnings-curves-the-past-present-and-future/

 

 

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