Reserving for Construction Defects

Construction Defects: Property and Casualty insurers and actuaries cringe at the very mention of those two words. Insurers are troubled by the high frequency of construction defect claims while actuaries have encountered countless struggles with finding an appropriate and reasonable 4 . - •method for projecting the emergence of construction defect losses. As actuaries, It is our job to help our clients understand the issues at hand and to provide them with estimates with which they can feel comfortable given the great deal of uncertainty embedded in the market. In this paper, we give the reader an overview of the issues surrounding an actuarial analysis of common defects. We provide background information, including relevant legal decisions and defining characteristics of construction defects. We discuss items that should be considered when performing an actuarial analysis of construction defect data and present a few of the tailored methodologies that we have employed in recent years. Finally, we offer our thoughts on current trends as well as what we might expect to see in the future.