2008 Casualty Loss Reserve SeminarSession 6 – Personal Automobile Reserving

September 11, 2007San Diego, CA

Presentation by John R. Forney, FCAS

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Outline

History of No-Fault Auto Insurance

Data Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves

Methodology

Other Considerations

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History of No-Fault Auto InsuranceTheory was developed in the mid-1960’s to

provide first party benefits while restricting the right to sue third parties

Sixteen (16) states and Puerto Rico adopted some form of no-fault auto insurance in the early- to mid-1970’s

Five (5) of those states have repealed their no-fault laws, although Pennsylvania passed a new no-fault law in 1990

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History of No-Fault Auto InsuranceMost states provide for limited first-party medical

benefits

Pennsylvania, New Jersey, and Michigan have provided unlimited first-party medicalPennsylvania until 1984 no-fault repealNew Jersey until 1990 reform (benefits in excess of

$75K ceded to UCJF)Michigan is still unlimited

These are the claims I will be talking about today

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Long-Term PIP Claims are UniqueTraumatic Injuries

Age of claimants

Nature of expenses

Case reserving

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Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves

Payments to Date

Baseline average annual payment

Future Inflation

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Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves

Mortality Table

Claimant Birth Date

Sex of Claimant

Impairment

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Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves

Reinsurance Parameters

Retention

Limit

Co-Participation

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Baseline Average Annual Payment

Historical Payments

Amounts

Nature of payments Consistency Less than annual, e.g. prostheses, pain medication

pumps Pharmaceuticals Care – Who is providing? Hospitalizations

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Baseline Average Annual Payment

Discussions with Claims Department Personnel

What are the causes of historical inconsistencies?

What might change?

Any unusual payments expected?

LAE

Medical bill repricing

IME’s

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Future InflationVery important and sensitive

Historical Medical Inflation (Medical CPI)

Nature of paymentsCarePharmaceuticalsHospitalizationsUtilization

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Mortality

Recently Published Table

Age of Claimant

Sex of Claimant

Impairment – Rated Age

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Reinsurance Parameters

Retention

Limit

Co-Participation

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MethodologyCalculate annual paid for each future year

using baseline and inflation rate

Calculate ceded part of annual payment

Calculate probability of survival at each age y (Dy/Dx), where x=current age

Discount each annual payment for mortality (payment times Dy/Dx)

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Other Considerations

Reinsurance

Structured Settlements

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Reinsurance Considerations

Limit – Inflation can erode limits more quickly than you think

Co-Participation in certain layers

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Reinsurance Considerations

Collectibility

Direct versus Broker Market

Layers

Reporting Issues

Commutations

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Structured Settlements

Provide certainty for insurer

Settlement is “discounted”

Need agreement with claimant/attorney and court approval

PA law nullifies them in certain circumstances

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Questions and (Maybe) Answers

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