CAS Loss Reserve SeminarCAS Loss Reserve Seminar CAS Loss Reserve SeminarCAS Loss Reserve Seminar

Unique Reserving Issues

For Private Passenger Automobiles

September 24, 2002

Greg Hayward - FCAS, FCIA, MAAA, CPCU

State Farm Mutual Automobile Insurance Company

Be CarefulBe Careful Be CarefulBe Careful

Ohio New York

New Jersey

Traditional MethodsTraditional Methods How Far Off Can You Be ? How Far Off Can You Be ?

Traditional MethodsTraditional Methods How Far Off Can You Be ? How Far Off Can You Be ?

1997 Ohio Uninsured/Underinsured

3 Year Paid Link Ratios 29.4% High

5 Year Paid Link Ratios 29.4% High

3 Year Incurred Link Ratios 11.9% High

5 Year Incurred Link Ratios 15.9% High

Bornhuetter-Ferguson 18.4% High

Why Didn’t Traditional MethodsWhy Didn’t Traditional MethodsWork ?Work ?

Why Didn’t Traditional MethodsWhy Didn’t Traditional MethodsWork ?Work ?

Ohio UM/UIM

1993 Supreme Court Ruling in the Savoie case: UM and UIM Coverage Stacks UIM Excess vs. difference in limits Each Person entitled to separate limits

1994 Martin Case – Owned but uninsured exclusion was invalidated

Oct. 1994 – Legislature changed UM/UIM back to pre-Savoie case

Traditional MethodsTraditional MethodsHow Far Off Can You BeHow Far Off Can You Be??

Traditional MethodsTraditional MethodsHow Far Off Can You BeHow Far Off Can You Be??

1999 Ohio Uninsured/Underinsured

3 Year Paid Link Ratios 28.1% Low

5 Year Paid Link Ratios 28.5% Low

3 Year Incurred Link Ratios 12.3% Low

5 Year Incurred Link Ratios 16.1% Low

Bornhuetter-Ferguson 3.2% High

Why Didn’t Traditional Why Didn’t Traditional Methods Work ?Methods Work ?

Why Didn’t Traditional Why Didn’t Traditional Methods Work ?Methods Work ?

1999 Ohio UM/UIM

Linko Case – Invalidated every UM rejection form

Scott-Prontzer Case – Employees and family members under employer’s UM coverage even when outside scope of employment in non-company vehicles

Supreme Court overturned the legislature’s tort reform law

Traditional MethodsTraditional MethodsHow Far Off Can You Be ?How Far Off Can You Be ?

Traditional MethodsTraditional MethodsHow Far Off Can You Be ?How Far Off Can You Be ?

New York AIP – PIP

3 Year Link Ratios 26.0% Low

5 Year Link Ratios 25.0% Low

Bornhuetter-Ferguson 52.9% Low

Why Didn’t Traditional Methods Why Didn’t Traditional Methods Work?Work?

Why Didn’t Traditional Methods Why Didn’t Traditional Methods Work?Work?

New York

Rapidly Changing Mix of Business -> 94-97 : 45% decline in policies with 56%

increase in cost per car

FR Law Change in 1996 from 10/20/5 to 25/50/10

Presbyterian case limiting the time to review claims without penalties

Suspected Fraud Claims Tripled

Traditional MethodsTraditional MethodsHow Far Off Can You Be ?How Far Off Can You Be ?

New Jersey PIP

3 Year Paid Link Ratios 35.2% Low5 Year Paid Link Ratios 32.8% Low

3 Year Incurred Link Ratios 15.0% Low5 Year Incurred Link Ratios 22.7% Low

Bornhuetter-Ferguson 13.7% Low

Why Didn’t Traditional Methods Work ?Why Didn’t Traditional Methods Work ? New Jersey

1990Half of the market was in residual market (FIUA) MTF forced depopulation (10/90-10/92 – Lost about $2 Billion in 2 years) – AIP startup on 10/92Take All Comers Law, Onerous Rate Regulation, Fraud, AbuseRapid growth with a deteriorating mix of business Excess Profits Law requires paid loss development 1997Establish Urban Enterprise Zone AssignmentsFurther Restricted Ability to Underwrite and Manage Business 1999Mandated 15% overall Rate Rollback, 27% on PIPReforms promised but not put into place

What Should I Do?What Should I Do?What Should I Do?What Should I Do? Don’t be just mechanical – Examine each consideration

in the Loss Reserve Principles and ASOP #36

Do exploratory data analysis of multiple diagnostics to detect changes in historical patterns

Use a multi-step process to gather input from Operational Areas (Accounting, Claims, Underwriting, Legal)

Compare to the rest of the Industry

Consult with external Actuaries

Do more frequent analyses using various methods