The UPR is subject to the rules set out for long-duration contracts in Statement of Statutory Accounting Principles 65 (SSAP 65). Because of the high frequency and narrow size-of-loss distribution of Warranty claims, conventional reserve estimators such as Bornhuetter-Ferguson work quite well to estimate the UPR, but to be applied properly they require special modifications. In particular, it is necessary to adjust for unreported losses in recent diagonals of the issue-versus-breakdown lag triangle, to adjust for exposures declining by development month because of cancellations, to estimate appropriate tail factors, to modify expected emergence patterns for coverage of an obligor’s failure to perform, and to reserve appropriately for unpaid future refunds; the last two items are not specifically addressed in the regulations.
This paper discusses the purpose and structure of the UPR for Warranty Insurance in general, describes the necessary modifications of conventional actuarial methods in detail, and illustrates them with examples.
Keywords: Unearned Premium Reserve, Warranty Insurance, Warranty Claims, Reserve Estimates
