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State Reserving Issues for Private Passenger Automobile

Explore complexities of private passenger auto reserving, exceptions to conventional methods, historic trends, and alternative approaches discussed in the seminar. Delve into loss reserve range, expense reserves, recent court decisions, and unique scenarios like UIMBI claims. Gain valuable insights for tackling reserving issues in the evolving insurance landscape.

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State Reserving Issues for Private Passenger Automobile

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  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unlimited medical benefits • Reinsurance Facilities or Catastrophic Loss Funds were set up to cover these benefits • PA repealed unlimited NF 10/84 • NJ repealed unlimited NF 1/91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year • No Fault costs grew over 90% per year • Uninsured population grew to 20% • A too-liberal threshold was blamed • Repealed October 1, 1984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

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