Reserving for Unlimited Long-Term No-Fault (PIP) Claims

1. Reserving for Unlimited Long-Term No-Fault (PIP) Claims 2008 Casualty Loss Reserve Seminar Session 6 – Personal Automobile Reserving September 11, 2007 San Diego, CA Presentation by John R. Forney, FCAS

2. Outline • History of No-Fault Auto Insurance • Data Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves • Methodology • Other Considerations

3. History of No-Fault Auto Insurance • Theory 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Puerto Rico adopted some form of no-fault auto insurance in the early- to mid-1970’s • Five (5) of those states have repealed their no-fault laws, although Pennsylvania passed a new no-fault law in 1990

4. History of No-Fault Auto Insurance • Most states provide for limited first-party medical benefits • Pennsylvania, New Jersey, and Michigan have provided unlimited first-party medical • Pennsylvania until 1984 no-fault repeal • New 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

5. Long-Term PIP Claims are Unique • Traumatic Injuries • Age of claimants • Nature of expenses • Case reserving

6. Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves • Payments to Date • Baseline average annual payment • Future Inflation

7. Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves • Mortality Table • Claimant Birth Date • Sex of Claimant • Impairment

8. Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves • Reinsurance Parameters • Retention • Limit • Co-Participation

9. 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

10. 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

11. Future Inflation • Very important and sensitive • Historical Medical Inflation (Medical CPI) • Nature of payments • Care • Pharmaceuticals • Hospitalizations • Utilization

12. Mortality • Recently Published Table • Age of Claimant • Sex of Claimant • Impairment – Rated Age

13. Reinsurance Parameters • Retention • Limit • Co-Participation

14. Methodology • Calculate 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)

15. Other Considerations • Reinsurance • Structured Settlements

16. Reinsurance Considerations • Limit – Inflation can erode limits more quickly than you think • Co-Participation in certain layers

17. Reinsurance Considerations • Collectibility • Direct versus Broker Market • Layers • Reporting Issues • Commutations

18. Structured Settlements • Provide certainty for insurer • Settlement is “discounted” • Need agreement with claimant/attorney and court approval • PA law nullifies them in certain circumstances

19. Questions and (Maybe) Answers