State Reserving Issues for Private Passenger AutomobileState Reserving Issues for Private Passenger Automobile

September 18-19, 2000Eugene C. Connell, FCAS, FCIA, MAAA

Erie Insurance Group

Casualty Loss Reserve SeminarConcurrent SessionCasualty Loss Reserve SeminarConcurrent Session

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Private Passenger Auto ReservingPrivate Passenger Auto Reserving

Straight forward coverages Lots of data Available industry benchmarks Traditional techniques should work fine BUT...

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“Exceptions To The Rule”“Exceptions To The Rule”

Unlimited No-Fault Coverage - PA Underinsured Motorists Coverage - PA Underinsured Motorists Coverage - OH

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Unlimited No Fault BackgroundUnlimited No Fault Background

No Fault laws in Michigan (10/73), New Jersey (1/73), and Pennsylvania (7/75) provided for unlimited medical benefits

Reinsurance Facilities or Catastrophic Loss Funds were set up to cover these benefits

PA repealed unlimited NF 10/84 NJ repealed unlimited NF 1/91

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Pennsylvania’s “Old” No FaultPennsylvania’s “Old” No Fault

Unlimited NF Benefits Passed July 19, 1975 Auto Liability costs grew 25% per year No Fault costs grew over 90% per year Uninsured population grew to 20% A too-liberal threshold was blamed Repealed October 1, 1984

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Paid: 74,613,007

Incurred:75,022,934

Auto NF Post1985 - CW 1994

Development Quarter

0

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

0 10 20 30 40 50 60 70 80

NF - Smooth and Quick DevelopmentNF - Smooth and Quick Development

Paid

Incurred

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Paid: 55,217,536

Incurred:72,362,947

Auto NF - Pre1986 - CW 1984

Development Quarter

0

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

0 10 20 30 40 50 60 70 80

Not So For “Old” NFNot So For “Old” NF

Paid

Incurred

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Reserving HistoryReserving History

All claims are case reserved 1985 memo: “Case reserves have been

established at amounts that are more than adequate for the foreseeable future”

Unusual tail noted by actuarial Traditional reserving methods don’t work! Lots of dollars involved

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Reserving History (continued)Reserving History (continued)

Case reserves were set projecting current payment rate to age 65

IBNR added to fund inflation Key assumptions:

Current annual payment Age of claimant Expected inflation rate

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Reserving History (continued)Reserving History (continued)

Management disbelief How could so few claims cost so much? How can so much IBNR be needed?

Insurance Department financial audit Reserving practices are great EXCEPT “old” no fault Need $100+ million more!

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Alternative Reserving ApproachesAlternative Reserving Approaches

Age-to-age factors Terminal age (e.g., 65) Standard mortality Impaired mortality

varying assumptions

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Age-To-Age FactorsAge-To-Age Factors

Pros easy to do easy to understand

Cons variation! accuracy?

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Terminal AgeTerminal Age

Pros Information available Easy to calculate Easy to construct ranges

Cons Terminal age is a judgment Accuracy?

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Pros Available tables Easy to understand Easy to calculate

Cons Appropriate assumption?

Standard MortalityStandard Mortality

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Pros Logical assumption Easy to apply

Cons What level of impairment? Lack of data on impaired mortality

Impaired MortalityImpaired Mortality

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Loss Reserve RangeLoss Reserve Range

Impact of Inflation and Mortality Assumptions

Gross of Ceded Reinsurance (in 000's)

Inflation RateMortality Assumption -2.0% 0.0% 2.0% 2.5% 4.0% 4.5% 5.0% 7.0%

Standard Mortality Table-1993 36,133 88,655 175,639 205,566 324,399 376,465 436,513 786,923Mortality Table-1993w/ qx=1.6 times standard 23,408 63,739 126,294 146,941 225,786 259,078 296,722 504,752Mortality Table-1993w/ qx=4.0 times standard (1,411) 21,076 52,134 61,657 95,645 109,094 123,784 197,720

Net of Ceded Reinsurance (in 000's)

Inflation RateMortality Assumption -2.0% 0.0% 2.0% 2.5% 4.0% 4.5% 5.0% 7.0%

Standard Mortality Table-1993 22,826 56,698 116,016 137,684 228,343 269,766 318,454 621,956Mortality Table-1993w/ qx=1.6 times standard 15,284 40,274 83,009 96,841 154,346 180,401 210,059 381,145Mortality Table-1993w/ qx=4.0 times standard (134) 14,159 34,147 40,480 64,591 74,017 84,113 137,358

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Other Possible ApproachesOther Possible Approaches

Establish a life annuity for each claimant and project future payments Define periodic expenditures Select inflation rate(s) for each expenditure Use various mortality assumptions Uses more detail, but Claims has info Same uncertainties: inflation and mortality

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Other Possible ApproachesOther Possible Approaches

Project on a calendar year basis Collect history of calendar year expenditures Analyze patterns and forecast “development”

Select decay patterns Fit tail

Uncertainty in pattern stability

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Loss Expense ReservesLoss Expense Reserves

There is substantial fluctuation in DCC payments year to year depending on the existence or absence of litigation

Could project “average” litigation year Average varies depending on how many years

are included

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Loss Expense ReservesLoss Expense Reserves

Assume litigation will continue Average DCC for years in which there was

substantial litigation - "litigation level DCC" Average DCC for years in which there was

little litigation - ”normal level DCC" Weight the litigation and normal level DCC More stable over the long term

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Recent Court DecisionsRecent Court Decisions

Drake v. Penn National (1992, Pennsylvania Supreme Court)

Taube v. Erie Insurance (1992, Pennsylvania Common Pleas Court)

Lyles v. INA (1998, Pennsylvania Superior Court)

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DrakeDrake

Redefines Medical Expense Claimant was placed in a nursing home because

no one at home could provide care any longer Lower court said expenses weren’t medical Higher court reversed Changed definition of attendant care versus

medical care

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TaubeTaube

Clarification of Drake Settlement practice was “in line” with Drake Claimant’s attorney disagreed Potential new standards on annual payments

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LylesLyles

Further defines medical expense Argument that meals and laundry are

replacement services, not medical services Replacement services coverage is limited to

365 days Court ruled that, in case of catastrophic injury,

these services are medical and vocational rehabilitation expenses

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UIMBI - Another “Exception”UIMBI - Another “Exception”

A straight forward coverage Insured makes a claim against own insurer

when damages exceed liability coverage of responsible party

Traditional reserving techniques should be sufficient

BUT...

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UIMBI Reserving - Watch for BumpsUIMBI Reserving - Watch for Bumps

Paid: 54,441,767

Incurred:54,526,768

Auto UMBI+UIMBI - CW 1987

Development Quarter

0

10000000

20000000

30000000

40000000

50000000

60000000

0 10 20 30 40 50 60 70 80

Paid

Incurred

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UIMBI ReservingUIMBI Reserving

Calculation of reserve may be based on traditional techniques but must include Exploratory data analysis to detect changes in

historical patterns Input of operational areas to determine validity

of assumptions Appropriate adjustment of data or selected age-

to-age factors to reflect changes in patterns

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Recent Court DecisionsRecent Court Decisions

Scott-Pontzer v. Liberty Mutual (1999, Ohio St.3d)

Harper v. Providence Washington (2000, Pennsylvania Superior Court)

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PontzerPontzer

Ohio Commercial Auto UIM Expanded coverage to all employees regardless

of whether employee was acting within the scope of employment at the time of the accident

Problem lies with the definition of insured ("you") in the policy

Expect additional claims on older accident years

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HarperHarper

Pennsylvania Personal Auto UIM (Boyle in 1995) Insured need not exhaust

liability limits of tortfeasor, but issuing carrier could reduce claim for tortfeasor limits

(Harper 1999) Insured no longer needs to claim against tortfeasor in order to proceed with a UIMBI claim

Insured may immediately proceed to arbitration

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HarperHarper

Arbitration forum has proven unfavorable Each party selects an arbiter Two arbiters agree on third "neutral" arbiter

If parties cannot agree, either party may petition court to appoint third arbiter

Experience is that settlements are larger when court appoints arbiter then when agree to an undesirable third arbiter

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HarperHarper

Claims will be reported more quickly Frequency may increase

Settlement speed may change Adjusters must investigate own insureds Have to subrogate against tortfeasor

Potential for claims on old accident years Insureds were referred to tortfeasor as first

source of settlement

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HarperHarper

May see elimination of arbitration provision from policies

May see a similar case brought to Supreme Court to reconsider

Either will change loss development patterns again

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ConclusionConclusion

PPA is not as straight forward as it seems Companies with concentrations of business

in certain states can see development patterns significantly altered by case law

It’s becoming more common for judicial opinions to affect old as well as new claims