Car buyers like the certainty that comes with a service contract for their shiny new vehicles. Companies that sell those warranties don’t like the uncertainty of how much that contract might cost them down the road.
An Alabama firm is perfecting a new accounting method that anticipates the real cost of service contracts by using millions of data points and proprietary algorithms.
Kerper and Bowron LLC is an actuarial, accounting and insurance consulting firm based in Birmingham.
Their namesake Kerper Bowron Method is, they say, “a breakthrough in service contract and extended warranty accounting that fundamentally changes how the global service contract industry recognizes revenue, manages reserves and unlocks billions in lending capital in the United States.”
The methodology replaces industry standard aggregate earning curves with precise, month-by-month likely cash-flow projections for every individual service contract.
Using point-of-sale data — term, mileage, coverage, deductible, vehicle profile, price and more — the formula spits out auditable, contract-specific accounting that aligns with actual experiences rather than past averages.
As a result, it should reduce the unknowns in the overall service contract industry — on vehicles in particular — by using a cash-flow projection instead of outdated earning curves.
Actuaries John Kerper and Lee Bowron hope the KB Method becomes the new standard for service contract estimation and accounting.
“The new process automates alignment with modern accounting standards, reducing audit risks and administrative burdens while providing real-time insights into claims and cancellations,” Bowron explains.
Adopting the KB Method “could transform the vehicle service contract market by injecting transparency, efficiency and capital,” he says, and “save billions in inefficiencies.”
The creators say it is the first method to mathematically satisfy the European Union’s “ideal equation” for finite, predictable risks — previously considered unsolvable for insurance exposure.
The patent-pending process can apply to virtually all service contracts covering repair, maintenance or accidental damage, from vehicles to phones, appliances and home systems.
“For decades, the service contract industry has relied on aggregate methods that couldn’t provide contract-level precision or adapt quickly to changing conditions,” says Bowron. “The Kerper Bowron Method changes that fundamentally, giving companies the ability to project losses and recognize revenue with actuarial accuracy for every individual contract.”
“This method offers financial institutions and service-contract providers a rare opportunity to turn rigorous accounting into a competitive advantage through superior, data-driven decision-making,” adds Kerper. “The contract-level visibility enables everything from better pricing and product development to more efficient capital deployment and regulatory compliance.”
The approach is basically a more modern, scientific take on anticipating risk and projecting costs of service contracts.
“What we’re doing is we’re kind of getting out of the ’80s and we’re moving to more of an algorithm,” Bowron explains. “Now what we have is the ability to take a service contract and say, ‘OK, now we’re going to look at it and we’re going to actually figure out where the exposure is during that 60 months because you need to account for that.’”
Some vehicle contracts, for example, cover 84 months or 84,000 miles.
“Some people will drive more than 84,000 miles,” he says. “So, at the end of the service contract, you have a little bit less exposure. So, you’re able to map out those exposures.”
When you bake in factors like the type of vehicle and deductibles, the new resulting data will be statistically more significant, they say.
“What we’re doing is with the algorithm, we’re able to project out what we think the costs are going to be for that service contract every month,” Bowron says. “Now that we have those costs for every month, we’ll recognize the revenue on that pattern.”
Bowron says he’s not aware of anything similar in the marketplace. Existing products needed better accounting and legal frameworks, he says.
“There’s definitely some people that obviously have some good statistical backgrounds out there, but I think it’s more the kind of marrying up of that to the accounting standards, which really hasn’t happened.”
The expectation is that a client would “send us their information about their contracts and their claims,” Bowron says, “and then what we would return is this sort of expected cash flow for each service contract.”
Ultimately, the process could be sold through a license but right now “we’re trying to get this methodology accepted by the industry,” he says.
Seeking peer input, the firm submitted a paper titled “The Kerper-Bowron Method: A Foundational Change for Service Contract Claim Estimation and Accounting” to the journal Risks. It was accepted for publication in February.
Its assertion is that the new process “revolutionizes service contract loss estimation and accounting by introducing a precise, contract-level approach to forecasting expected losses and cancellations.”
As a result, it should offer better accuracy, automation and compliance, which redefines actuarial and financial practices for vehicle and other service contracts.
Lag time now between when contracts are sold and when claims roll in creates some uncertainty. With the KB Method, accurate financial statements will be available earlier for pricing and evaluation — perhaps leading to changes in future contract details.
“They might get rid of certain offerings or hopefully they would feel more comfortable about maybe even expanding offerings or new types of coverage,” Bowron says.
KB Method pilot programs are under way in the U.S. and Canada. The partners are researching its applicability to capital markets such as derivatives or options on defined service-contract exposure.
Service contracts, or extended warranties, are a huge part of the global insurance and consumer protection market. Sales are projected to reach $250 billion by 2031. The value of the U.S. vehicle service contract industry alone is currently estimated at more than $30 billion annually.
Plans typically cover repair, maintenance and damage to appliances, vehicles, electronics and more. Estimating losses and revenue is crucial for insurers, administrators and retailers, experts say.
Traditional actuarial practice relies on data and methods “which date back over 40 years,” Kerper and Bowron say in their article. That leads to “inefficiencies in reserving, compliance and capital management.”
As a practical matter, service contract administrators, reinsurers and financial institutions would have less manual reserving work, better real-time equity visibility and compliance.
“The heart of the KB Method is the stream of expected cash flows for the entire length of the contract,” they say in Risks. “These expected cash flows drive the entire balance sheet by providing contract level estimates of all relevant liabilities.”
Accurate contract-level projections reveal true equity value, enabling dealers to secure loans against unearned premiums, too — potentially unlocking up to 30% more capital for inventory or expansions, Bowron says. As a result, accurate cancellation forecasts allow for better budgeting by auto dealerships.
Using Microsoft Access, Kerper and Bowron began developing the process in 2003 by focusing on two main components: exposure development and loss projection.
The firm has done similar consulting work for years. Bowron says, “I think this thing would be potentially a lot bigger than any of those and would probably be, by far, the largest part of the practice.”
Kerper Bowron began in 2003 upstairs from a dental office. Both founders had experience in the insurance industry. The company employs 11 and also has offices in Chicago and Berthoud, Colorado. The affiliated company, Irish Trinity LLC, formed in 2024 to develop their intellectual property.
Deborah Storey is a Huntsville-based freelance contributor to Business Alabama.
This article appears in the April 2026 issue of Business Alabama.
