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PERSONAL AUTO RESERVING IN A CHANGING CLAIMS ENVIRONMENT

This seminar discusses the impact of environmental factors, changing claim practices, and industrywide loss development on personal auto reserving. The panelists provide insights and discuss the actuarial impact of claim initiatives.

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PERSONAL AUTO RESERVING IN A CHANGING CLAIMS ENVIRONMENT

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  1. PERSONAL AUTO RESERVING IN A CHANGING CLAIMS ENVIRONMENT 1998 Casualty Loss Reserve Seminar Philadelphia, Pennsylvania Track 2 September 28, 1998 Moderator: Scott P. Weinstein Panelists: Christopher A. Gonwa

  2. PERSONAL AUTO RESERVING IN A CHANGING CLAIMS ENVIRONMENT Overview • Private Passenger Automobile Results • Industrywide Loss Development • Environmental Factors • Changing Claim Practices • Christopher A. Gonwa, Allstate Insurance Company • Actuarial Impact of Claim Initiatives • Q & A

  3. Private Passenger Automobile ResultsNet Loss and LAE Ratio - Liability / Medical

  4. Private Passenger Automobile ResultsDirect Loss and ALAE Ratio - Other PP Auto Liability

  5. Private Passenger Automobile ResultsDirect Loss and ALAE Ratio - Other PP Auto Liability Top 100 Companies

  6. Private Passenger Automobile ResultsDirect Loss and ALAE Ratio - Other PP Auto Liability Top 100 Companies

  7. Private Passenger Automobile Results1 and 2 Year Reserve Development(in $B)

  8. Industrywide Loss DevelopmentPrivate Passenger Automobile Liability Incurred Age-to-Age Factors

  9. Industrywide Loss DevelopmentPrivate Passenger Automobile Liability Paid Age-to-Age Factors

  10. Environmental FactorsPrivate Passenger Auto Liability • Reductions in annual inflation rates • Increased use of seat belts • Increased use of airbags, and other safety features • Decreases in the use of alcohol / DWI • Increases in average car size • Proportional reduction in youthful drivers

  11. Environmental FactorsPrivate Passenger Auto Liability • Other Issues: • Familiarity with Managed Care • Claims consciousness • Aggressiveness of Plaintiff’s Bar

  12. Changing Claims PracticesPrivate Passenger Auto Liability • Christopher Gonwa - Allstate Insurance Company • Senior Manager - Personal Lines Finance • Chartered Property and Casualty Underwriter • Nearing completion of Executive MBA at Univ. of Illinois - Chicago • 11 years of experience in Claims Reserve Division. • Personal Lines Finance - Claims Support (March, 1998)

  13. Comprehensive Cost Driver Framework • Pre-accident drivers attributes and vehicle characteristics. • External environment. • Compensation system. • Post-accident factors.

  14. Pre-Accident Cost Drivers Elements traditionally shown on the policy application: • driver attributes - age, sex, marital status, driving record. • vehicle characteristics - make and model, mileage driven, multi-car discounts, vehicle use. • policy age - new versus renewal policy. These factors are important for predicting the occurrence of a physical event.

  15. Driver Attributes Vehicle Characteristics Garaging Location Traditional Framework Pre-Accident Factors Physical Accident Insurance Compensation

  16. External Environment Characteristics which affect claim frequency and claim severity that are beyond immediate company control. • physical qualities - traffic density, road hazards and maintenance, and safety regulations. • economic qualities - prosperity versus recession, rates of inflation. • human qualities - concentration of uninsured motorists, demographic shifts.

  17. Environmental FactorsAuto BI Claim Cost Inflation Source: Best’s Review

  18. Environmental FactorsConsumer Price Index - Medical Care Inflation Source: Bureau of Labor Statistics

  19. Environmental FactorsSeat Belt Use Rates Source: National Highway Traffic Safety Association

  20. Environmental FactorsPercentage of Fatalities with BAC > .10

  21. Environmental FactorsPercentage of Population Under 25 U.S. Census Bureau

  22. Environmental FactorsFatality Rate per 100 Million VMT Source: FARS and GES

  23. Compensation Systems • Compensation systems may be grouped into tort liability, no-fault, and add-on systems. • The compensation system has a direct effect on claim frequency and claim severity. • Important in explaining state-by-state differences in insurance costs.

  24. Post-Accident Factors Relate to whether an injury claim will be brought for the accident and the amount of the claim. • type of injury - soft-tissue vs. fractures vs. more serious injuries. • attorney representation • type of medical practitioner - physician vs. chiropractor vs. physical therapist. Type of treatment. • claims consciousness • company initiatives - medical bill review, early contact of third party claimants, review of soft-tissue claims, quality of claims handling, etc.

  25. Comprehensive Framework External Environment Interactions Interactions Physical Accident / Insurance Compensation Post-Accident Factors Pre-Accident Factors Interactions Interactions Compensation System

  26. Changing Claims PracticesPrivate Passenger Auto Liability • Internal Initiatives • Medical and legal cost containment initiatives • Material damage claim handling • Claimant contact programs • Soft-tissue claims handling • Claim staffing requirements • Benchmarking: • Expert Reserving Systems • Adjuster Guidelines

  27. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability • Sample Methodologies: • Standard Berquist / Sherman analysis. • Adjustments made for changes in settlement rate. • Adjustments made for trend in average outstanding amounts. • Consideration of basis for interpolation base • Closed Claims • Claims Closed With Amounts • Claims Closed With Amounts > $ • Actual Claim Closure • Shift in type of claims being closed adds complexity.

  28. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  29. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  30. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  31. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability • Loss Development Trend Analysis • Define metrics that evaluate the Company’s success in achieving various claim initiatives. • Develop regression models to distinguish between positive influences of claims initiatives and other environmental influences. • Utilize the regression models to identify conditions which would lead to turning-points in loss development.

  32. Changing Claims PracticesStrategic and Operational Model Mission Key Issues Goals Objectives Processes Metrics

  33. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  34. Loss Development Trend Analysis Selection Criteria: • Fit Statistics • R-Squared, Adj. R-Squared, Standard Error, etc. • Reasonability of coefficients • Multi-collinearity • Availability of metrics

  35. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability Fitted Change in Development Factor = Annual Change in: BI/PD x 0.08797 + Attorney Rep. Rate x 2.68400 + Contact Time x 8.64900 + Med. Inflation x 0.04777 - Restraint Use x 0.61062 constant + 0.05177 R Squared 0.97976

  36. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  37. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  38. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  39. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  40. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  41. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  42. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability

  43. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability • Loss Development Trend Analysis - Observations: • Aids in distinguishing between the effects of environmental factors and company initiatives. • Helps to quantify the impact of company initiatives. • Identifies conditions which would lead to turning-points in loss development.

  44. Actuarial Impact of Changing Claims PracticesPrivate Passenger Auto Liability - “CPR” • Be CONVERSANT • Be PROACTIVE • Be a RESOURSE

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