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Financial modeling study demonstrates contract-level claim projections for manufacturer warranties, indicating viable frameworks for collateralized risk transfer and lending.
The Kerper–Bowron (KB) Method (patent pending) projects expected claims at the individual contract level. This paper extends that cash-flow engine to manufacturer-warranty accruals and to three proposed uses: collateralized risk transfer, lending against service-contract equity, and risk-adjusted customer lifetime value (CLV). Manufacturer warranties and separately priced service contracts are treated as related but distinct products under ASC 460, ASC 450, and IAS 37. Expected cost per unit of exposure is formed with a generalized linear model; a Tweedie mean–variance function is used as a working choice, not as a tested warranty distribution. Accident-month estimates are allocated to payment months, incurred-but-not-reported cost on pre-valuation months is isolated, and remaining paid cash flow is split into pre-valuation runoff and post-valuation occurrence. One present-value risk margin is taken from the predictive distribution as the present value of the gap between a stated percentile and the mean; a constant loading on the discounted mean is an illustrative substitute when simulation is not run. The contribution is contract-level granularity and a single paid path that can be refreshed as experience and assumptions change. The same paid path can be used as a financial-monitoring tool: expected claims, equity, and risk-adjusted values can be refreshed as time passes, actual results emerge, and model or economic assumptions change. Accuracy, balance sheet derecognition, investor diversification, and lendable capacity would be the subject of further research.
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Bowron et al. (2026) studied this question.
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