State Reserving Issues for Private Passenger Automobile

1. Casualty Loss Reserve SeminarConcurrent Session State Reserving Issues for Private Passenger Automobile September 18-19, 2000 Eugene C. Connell, FCAS, FCIA, MAAA Erie Insurance Group

2. Private Passenger Auto Reserving • Straight forward coverages • Lots of data • Available industry benchmarks • Traditional techniques should work fine • BUT...

3. “Exceptions To The Rule” • Unlimited No-Fault Coverage - PA • Underinsured Motorists Coverage - PA • Underinsured Motorists Coverage - OH

4. Unlimited 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unlimited medical benefits • Reinsurance Facilities or Catastrophic Loss Funds were set up to cover these benefits • PA repealed unlimited NF 10/84 • NJ repealed unlimited NF 1/91

5. Pennsylvania’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year • No Fault costs grew over 90% per year • Uninsured population grew to 20% • A too-liberal threshold was blamed • Repealed October 1, 1984

6. NF - Smooth and Quick Development Incurred Paid

7. Not So For “Old” NF Incurred Paid

8. Reserving 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

9. 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

10. 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!

11. Alternative Reserving Approaches • Age-to-age factors • Terminal age (e.g., 65) • Standard mortality • Impaired mortality • varying assumptions

12. Age-To-Age Factors • Pros • easy to do • easy to understand • Cons • variation! • accuracy?

13. Terminal Age • Pros • Information available • Easy to calculate • Easy to construct ranges • Cons • Terminal age is a judgment • Accuracy?

14. Standard Mortality • Pros • Available tables • Easy to understand • Easy to calculate • Cons • Appropriate assumption?

15. Impaired Mortality • Pros • Logical assumption • Easy to apply • Cons • What level of impairment? • Lack of data on impaired mortality

16. Loss Reserve Range

17. Other 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

18. Other 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

19. Loss 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

20. Loss 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

21. Recent 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)

22. Drake • 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

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

24. Lyles • 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

25. 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...

26. UIMBI Reserving - Watch for Bumps Incurred Paid

27. UIMBI 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

28. Recent Court Decisions • Scott-Pontzer v. Liberty Mutual • (1999, Ohio St.3d) • Harper v. Providence Washington • (2000, Pennsylvania Superior Court)

29. Pontzer • 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

30. Harper • 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

31. Harper • 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

32. Harper • 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

33. Harper • 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

34. Conclusion • 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