Auto Insurance Success Stories

1. Auto Insurance Success Stories Casualty Loss Reserve Seminar September 12-14, 2005

2. PENNSYLVANIA ACT 6: A RETROSPECTIVE REVIEW Casualty Loss Reserve Seminar September 12-14, 2005 By Kevin Russell, FCAS ERIE INSURANCE GROUP

3. Part 1: Originally Presented as“Auto Managed Care: Pennsylvania’s Act 6 of 1990” By Chet Szczepanski

4. Agenda • Review economic and social background leading to Act 6 • Review legislative background leading to Act 6 • Review specifics of Act 6 • Examine loss cost saving effects of medical cost containment features implemented by Act 6 • Examine impact on loss development and reserving

5. Economic & Social Background • Climate of the 1970’s and 1980’s: • High rates of inflation throughout period, especially medical inflation • Society becoming increasingly litigious, particularly in large population centers such as Philadelphia

6. Economic & Social Background(continued) • Insurance Marketplace in the 1970’s and 1980’s • Persistent rate increases outpacing rates of inflation • Rate increases consistently in the double digits in Philadelphia • Considerable public discontent • Clamor for increased regulatory scrutiny & control

7. Legislative Background • July 19, 1974: Legislature enacts Pennsylvania No-Fault Motor Vehicle Insurance Act • Key Features: • Unlimited Medical Coverage • $750 Monetary Threshold to Bring Suit

8. Legislative Background(Continued) • Inflation quickly erodes effectiveness of $750 monetary threshold • Ineffective threshold and unlimited medical coverage are catalyst for increased suit activity and, in turn, excessive medical usage to perfect claims

9. Legislative Background(Continued) • October 1, 1984: Pennsylvania Legislature repeals No-Fault Motor Vehicle Insurance Act and enacts Motor Vehicle Financial Responsibility Law • Key Features: • Tort System with add-on First Party Benefits • Medical Coverage now limited (minimum limit $10,000 Medical Benefits)

10. Legislative Background(Continued) • To compensate for such severely reduced Medical Benefit coverage, Automobile Catastrophic Loss Trust Fund established • Coverage from $100,000 to $1,000,000 • A State Fund (Not a private sector program) • Mandatory Participation • Funded on a pay as you go basis • initial “Fee” $5.00 • Fee paid with annual automobile registration • As “Fee” increases, considerable discontent • As Fee hits $25.00, Letter to the Editor states: “I don’t have a cat, what do I need a Cat Fund for?”

11. Legislative Background(Continued) • Quite possibly worst possible system from a cost perspective: • Tort system without limit to suits combined with add-on first party benefits • Mandatory uninsured/underinsured motorists coverage, which courts rule can be stacked • Combined effects of increased suit activity and accelerating inflation leads to even greater and more frequent rate increases

12. Legislative Background(Continued) • Governor Robert P. Casey takes office in January, 1987 • A populist governor, he makes auto insurance reform one of his major legislative goals

13. Legislative Background(Continued) • Governor Casey introduces a comprehensive auto insurance reform package in early 1988 • No-Fault system with $10,000 monetary threshold • 80% of bodily injury claims have associated medical costs less than $10,000 • Casey’s proposal fails to gain substantive support from any constituency

14. Legislative Background(Continued) • Constituencies (Depending on the reform package, they can be either obstacles or facilitators) • The Public • The Legislature • The Insurance Industry • The Trial Bar • The Medical Community

15. Legislative Background(Continued) • December 12, 1988: Pennsylvania Legislature Repeals Automobile Catastrophic Loss Trust Fund • Institutes runoff of current claims to be funded by surcharge on driving violation fees • Mandates that insurance marketplace offer Extraordinary Medical Benefit Coverage for voluntary purchase • Coverage similar to original Cat Fund • Initial actuarial cost $45.00

16. Legislative Background(Continued) • February 7, 1990: Governor Casey signs into law Act 6 of 1990 which substantially modifies the Motor Vehicle Financial Responsibility Law • A “Choice No-Fault” System

17. Act 6 of 1990 • Key Features • Policyholders can voluntarily restrict their ability to seek recovery for non-economic damages, such as pain and suffering, to only those cases resulting in death, serious impairment of bodily function, or permanent serious disfigurement. • Policyholders are prohibited from recovering for economic damages under other insurance coverage, such as Accident & Health Insurance

18. Act 6 of 1990 • Key Features (continued) • Increased uninsured motorist detection efforts • Increased anti-fraud measures • Penalties for insurance fraud stiffened from a misdemeanor to a third degree felony

19. Act 6 of 1990 • Key Features (continued) • Auto insurers’ medical benefit payments are controlled by generally limiting providers to 110% of the prevailing fee available under Medicare. • Insurers must contract with peer-review organizations to more effectively evaluate the reasonableness and necessity of medical services and treatment.

20. Act 6 of 1990 • Key Features (continued) • MANDATORY RATE ROLLBACKS!

21. Constituencies (Revisited) • The Public • The Legislature • The Insurance Industry • The Trial Bar • The Medical Community

22. Chet’s CONCLUSIONS • Act 6 enacted because a successful coalition of constituencies formed • Act 6, especially Choice Features and Medical Cost Containment Features, a big success • Such law changes have substantial effects on actuarial analyses

23. Part 2: PENNSYLVANIA ACT 6 A RETROSPECTIVE REVIEWUpdated 8/2005

24. Updated 8/2005- How Were Auto Coverages Affected? • Rollbacks: Limited vs. Full Tort Option • Lower Minimum/Optional Coverages • Mandatory Discounts/Deductibles • Utilization of Medical Fee Schedule • Elimination of Duplicate Recoveries • Coverage Restrictions on Impaired/Fraudulent Drivers

25. Update 8/2005: How Were Auto Coverages Affected? • Rollbacks: Limited vs. Full Tort Option • Coverages affected: All coverages (including Comp and Coll) • Coverage Impact: Rate reduction-10% for full tort, 22% for limited tort • Loss Cost component affected: Frequency- selecting limited tort option limits the ability to recover non-economic damages such as pain and suffering. However, company exposure is not necessarily reduced since limited tort electors can still be sued in court by full tort electors

26. Update 8/2005: How Were Auto Coverages Affected? • Lower Minimum/Optional Coverages • Coverages affected: FPB, wage loss/ funeral/UMUIM • Coverage Impact: Min FPB lowered from 10k to 5k, wage loss/funeral/UMUIM optional • Loss Cost component affected: Frequency (if decline optional coverages), Severity (if FPB coverage reduced)

27. Update 8/2005: How Were Auto Coverages Affected? • Mandatory Discounts/Deductibles • Coverages affected: All • Coverage Impact: • FPB: 15% passive seatbelts, 20% driver side airbag, 30% 2 airbags • Comp: 10% anti-theft devices • Comp/Coll: Mandatory $500 ded (can request lower) • All coverages: 5% for driver’s training course (55+) • Loss Cost component affected: Frequency (higher ded/ increase in anti-theft devices/ driver training should lead to decrease), Severity (higher ded leads to increase, increase in driver safety devices leads to severity decrease)

28. Update 8/2005: How Were Auto Coverages Affected? • Utilization of Medical Fee Schedule • Coverages affected: BI, FPB, UMUIM • Coverage Impact: Pay no more than 110% of the prevailing charge at the 75th percentile (physician services) • Loss Cost component affected: Severity

29. Update 8/2005: How Were Auto Coverages Affected? • Elimination of Duplicate Recoveries • Coverages affected: BI, UMUIM • Coverage Impact: Auto coverage is normally the primary coverage, however, WC coverage could be primary for some claims • Loss Cost component affected: Frequency

30. Update 8/2005: How Were Auto Coverages Affected? • Coverage Restrictions on Impaired/ Fraudulent Drivers • Coverages affected: BI, FPB, UMUIM • Coverage Impact: • Bars recovery for drivers under the influence of drugs/ alcohol • Tougher enforcement against uninsured motorists • Auto Ins. fraud goes from misdemeanor to third degree felony offense • Loss Cost component affected: Frequency

31. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

32. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

33. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

34. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

35. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

36. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

37. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

38. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

39. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

40. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000

41. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000 Personal Vol Auto BI - PA Paid LOSS

42. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 - 2000 Personal Vol Auto No-Fault - PA Paid LOSS

43. Update 8/2005: A Retrospective Review • Erie Insurance Group 1988 – 2000 Personal Vol Auto UMUIM - PA Paid LOSS

44. First Party BenefitsArising Claim Frequency

45. First Party BenefitsAverage Paid Loss

46. Medical Incurred Development

47. Medical Paid Development

48. Update 8/2005: Other Factors • Act 6 applies to all policies issued or renewed after July 1, 1990. Should Act 6 get all the credit? What about… • Increase in Gas Prices? • Annual Highway Miles Driven? • Increase in PA Unemployment Rate? • Shift in Types of Cars Driven? • Slowing Settlement Rates? • Other Factors?

49. Update 8/2005: Other Factors • Increase in Gas Prices? (Source: www.bls.gov)

50. Update 8/2005: Other Factors • Increase in Gas Prices? (Source: www.bls.gov)