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Contingent Liability Risk
Retention Groups for
Automobile Warranty
Companies
Mark J. Sobel, FCAS, MAAA
Financial Risk Analysts, LLC
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
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Automobile Warranty Companies
Provide extended service contracts (ESC’s)
for new and used vehicles
Contracts vary by term and/or mileage
Not regulated as insurance companies
Majority of states require an insurance
product
Financial Risk Analysts, LLC
Automobile Warranty Companies
Loss Reserving Issues—
--Issue Long Duration Contracts
--Earnings Curves
--Liability Matching
Financial Risk Analysts, LLC
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 insured’s contractual
obligation under the service contracts issued by
the insured.
Coverage hereunder shall be provided on a claims
made basis.
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Insuring Agreement #1 (cont.)
Termination of this policy shall not affect
or reduce the Company’s 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.
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• 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.
Financial Risk Analysts, LLC
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.
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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.
Financial Risk Analysts, LLC
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.
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RRG Loss Reserving Issues
 Definition of loss occurrence
(occurrence or claims made?)
 Date of loss
 Loss trigger
 Surplus/deficit of warranty company
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RRG Loss Reserve Approaches
 Zero loss reserves
 Loss reserve equal to deficit
 Loss reserve equal to deferred revenue
 Target loss ratio
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Other RRG Reserve Issues
Loss reserve opinion-variability,
materiality
Unearned premium reserve
opinion
Financial Risk Analysts, LLC