Auto Insurance Success Stories

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Auto Insurance Success Stories

• Casualty Loss Reserve Seminar
• September 12-14, 2005

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PENNSYLVANIA ACT 6 A RETROSPECTIVE REVIEW

• Casualty Loss Reserve Seminar
• September 12-14, 2005
• By Kevin Russell, FCAS
• ERIE INSURANCE GROUP

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Part 1 Originally Presented asAuto Managed
Care Pennsylvanias Act 6 of 1990

• By Chet Szczepanski

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Agenda

• Review economic and social background leading to
  Act 6
• Review legislative background leading to Act 6
• Review specifics of Act 6
• Examine loss cost saving effects of medical cost
  containment features implemented by Act 6
• Examine impact on loss development and reserving

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Economic Social Background

• Climate of the 1970s and 1980s
• High rates of inflation throughout period,
  especially medical inflation
• Society becoming increasingly litigious,
  particularly in large population centers such as
  Philadelphia

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Economic Social Background(continued)

• Insurance Marketplace in the 1970s and 1980s
• Persistent rate increases outpacing rates of
  inflation
• Rate increases consistently in the double digits
  in Philadelphia
• Considerable public discontent
• Clamor for increased regulatory scrutiny control

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Legislative Background

• July 19, 1974 Legislature enacts Pennsylvania
  No-Fault Motor Vehicle Insurance Act
• Key Features
• Unlimited Medical Coverage
• 750 Monetary Threshold to Bring Suit

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Legislative Background(Continued)

• Inflation quickly erodes effectiveness of 750
  monetary threshold
• Ineffective threshold and unlimited medical
  coverage are catalyst for increased suit activity
  and, in turn, excessive medical usage to perfect
  claims

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Legislative Background(Continued)

• October 1, 1984 Pennsylvania Legislature repeals
  No-Fault Motor Vehicle Insurance Act and enacts
  Motor Vehicle Financial Responsibility Law
• Key Features
• Tort System with add-on First Party Benefits
• Medical Coverage now limited (minimum limit
  10,000 Medical Benefits)

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Legislative Background(Continued)

• To compensate for such severely reduced Medical
  Benefit coverage, Automobile Catastrophic Loss
  Trust Fund established
• Coverage from 100,000 to 1,000,000
• A State Fund (Not a private sector program)
• Mandatory Participation
• Funded on a pay as you go basis
• initial Fee 5.00
• Fee paid with annual automobile registration
• As Fee increases, considerable discontent
• As Fee hits 25.00, Letter to the Editor states
  I dont have a cat, what do I need a Cat Fund
  for?

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Legislative Background(Continued)

• Quite possibly worst possible system from a cost
  perspective
• Tort system without limit to suits combined with
  add-on first party benefits
• Mandatory uninsured/underinsured motorists
  coverage, which courts rule can be stacked
• Combined effects of increased suit activity and
  accelerating inflation leads to even greater and
  more frequent rate increases

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Legislative Background(Continued)

• Governor Robert P. Casey takes office in January,
  1987
• A populist governor, he makes auto insurance
  reform one of his major legislative goals

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Legislative Background(Continued)

• Governor Casey introduces a comprehensive auto
  insurance reform package in early 1988
• No-Fault system with 10,000 monetary threshold
• 80 of bodily injury claims have associated
  medical costs less than 10,000
• Caseys proposal fails to gain substantive
  support from any constituency

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Legislative Background(Continued)

• Constituencies (Depending on the reform package,
  they can be either obstacles or facilitators)
• The Public
• The Legislature
• The Insurance Industry
• The Trial Bar
• The Medical Community

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Legislative Background(Continued)

• December 12, 1988 Pennsylvania Legislature
  Repeals Automobile Catastrophic Loss Trust Fund
• Institutes runoff of current claims to be funded
  by surcharge on driving violation fees
• Mandates that insurance marketplace offer
  Extraordinary Medical Benefit Coverage for
  voluntary purchase
• Coverage similar to original Cat Fund
• Initial actuarial cost 45.00

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Legislative Background(Continued)

• February 7, 1990 Governor Casey signs into law
  Act 6 of 1990 which substantially modifies the
  Motor Vehicle Financial Responsibility Law
• A Choice No-Fault System

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Act 6 of 1990

• Key Features
• Policyholders can voluntarily restrict their
  ability to seek recovery for non-economic
  damages, such as pain and suffering, to only
  those cases resulting in death, serious
  impairment of bodily function, or permanent
  serious disfigurement.
• Policyholders are prohibited from recovering for
  economic damages under other insurance coverage,
  such as Accident Health Insurance

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Act 6 of 1990

• Key Features (continued)
• Increased uninsured motorist detection efforts
• Increased anti-fraud measures
• Penalties for insurance fraud stiffened from a
  misdemeanor to a third degree felony

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Act 6 of 1990

• Key Features (continued)
• Auto insurers medical benefit payments are
  controlled by generally limiting providers to
  110 of the prevailing fee available under
  Medicare.
• Insurers must contract with peer-review
  organizations to more effectively evaluate the
  reasonableness and necessity of medical services
  and treatment.

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Act 6 of 1990

• Key Features (continued)
• MANDATORY RATE ROLLBACKS!

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Constituencies (Revisited)

• The Public
• The Legislature
• The Insurance Industry
• The Trial Bar
• The Medical Community

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Chets CONCLUSIONS

• Act 6 enacted because a successful coalition of
  constituencies formed
• Act 6, especially Choice Features and Medical
  Cost Containment Features, a big success
• Such law changes have substantial effects on
  actuarial analyses

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Part 2 PENNSYLVANIA ACT 6 A RETROSPECTIVE
REVIEWUpdated 8/2005
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Updated 8/2005- How Were Auto Coverages Affected?

• Rollbacks Limited vs. Full Tort Option
• Lower Minimum/Optional Coverages
• Mandatory Discounts/Deductibles
• Utilization of Medical Fee Schedule
• Elimination of Duplicate Recoveries
• Coverage Restrictions on Impaired/Fraudulent
  Drivers

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Update 8/2005 How Were Auto Coverages Affected?

• Rollbacks Limited vs. Full Tort Option
• Coverages affected All coverages (including
  Comp and Coll)
• Coverage Impact Rate reduction-10 for full
  tort, 22 for limited tort
• Loss Cost component affected Frequency-
  selecting limited tort option limits the ability
  to recover non-economic damages such as pain and
  suffering. However, company exposure is not
  necessarily reduced since limited tort electors
  can still be sued in court by full tort electors

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Update 8/2005 How Were Auto Coverages Affected?

• Lower Minimum/Optional Coverages
• Coverages affected FPB, wage loss/
  funeral/UMUIM
• Coverage Impact Min FPB lowered from 10k to 5k,
  wage loss/funeral/UMUIM optional
• Loss Cost component affected Frequency (if
  decline optional coverages), Severity (if FPB
  coverage reduced)

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Update 8/2005 How Were Auto Coverages Affected?

• Mandatory Discounts/Deductibles
• Coverages affected All
• Coverage Impact
• FPB 15 passive seatbelts, 20 driver side
  airbag, 30 2 airbags
• Comp 10 anti-theft devices
• Comp/Coll Mandatory 500 ded (can request
  lower)
• All coverages 5 for drivers training course
  (55)
• Loss Cost component affected Frequency (higher
  ded/ increase in anti-theft devices/ driver
  training should lead to decrease), Severity
  (higher ded leads to increase, increase in driver
  safety devices leads to severity decrease)

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Update 8/2005 How Were Auto Coverages Affected?

• Utilization of Medical Fee Schedule
• Coverages affected BI, FPB, UMUIM
• Coverage Impact Pay no more than 110 of the
  prevailing charge at the 75th percentile
  (physician services)
• Loss Cost component affected Severity

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Update 8/2005 How Were Auto Coverages Affected?

• Elimination of Duplicate Recoveries
• Coverages affected BI, UMUIM
• Coverage Impact Auto coverage is normally the
  primary coverage, however, WC coverage could be
  primary for some claims
• Loss Cost component affected Frequency

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Update 8/2005 How Were Auto Coverages Affected?

• Coverage Restrictions on Impaired/ Fraudulent
  Drivers
• Coverages affected BI, FPB, UMUIM
• Coverage Impact
• Bars recovery for drivers under the influence of
  drugs/ alcohol
• Tougher enforcement against uninsured motorists
• Auto Ins. fraud goes from misdemeanor to third
  degree felony offense
• Loss Cost component affected Frequency

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000 Personal Vol
  Auto BI - PA Paid LOSS

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 - 2000 Personal Vol
  Auto No-Fault - PA Paid LOSS

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Update 8/2005 A Retrospective Review

• Erie Insurance Group 1988 2000 Personal Vol
  Auto UMUIM - PA Paid LOSS

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First Party BenefitsArising Claim Frequency
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First Party BenefitsAverage Paid Loss
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Medical Incurred Development
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Medical Paid Development
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Update 8/2005 Other Factors

• Act 6 applies to all policies issued or renewed
  after July 1, 1990. Should Act 6 get all the
  credit? What about
• Increase in Gas Prices?
• Annual Highway Miles Driven?
• Increase in PA Unemployment Rate?
• Shift in Types of Cars Driven?
• Slowing Settlement Rates?
• Other Factors?

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Update 8/2005 Other Factors

• Increase in Gas Prices? (Source www.bls.gov)

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Update 8/2005 Other Factors

• Increase in Gas Prices? (Source www.bls.gov)

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Update 8/2005 Other Factors

• Annual Highway Miles Driven? (Source
  www.fhwa.dot.gov)

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Update 8/2005 Other Factors

• Increase in PA Unemployment Rate? (Source
  www.bls.gov)

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Update 8/2005 Other Factors

• Increase in PA Unemployment Rate? (Source
  www.bls.gov)

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Update 8/2005 Other Factors

• Shift in Types of Cars Driven? (Source
  www.eia.doe.gov)

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Update 8/2005 Other Factors

• Shift in Types of Cars Driven? (Source
  www.eia.doe.gov)
• Light trucks' share of total vehicle-miles
  traveled rose from one-fourth in 1988 to
  one-third in 1994
• Two segments of the light truck fleet--minivans
  and sport utility-vehicles-were driven more miles
  per year per vehicle than were passenger cars.

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Update 8/2005 Other Factors

• Slowing Settlement Rates?
• Auto insurers medical benefit payments are
  limited to 110 of the prevailing fee available
  under Medicare.
• Insurers must contract with peer-review
  organizations
• Learning curve Claims departments now have to
  access cost of injuries against fee schedule
• Result Settlement rates slow, paid losses
  artificially lowered

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Update 8/2005 Other Factors

• Other Factors?
• Operation Desert Storm (January 17, 1991)
• Increase in average age/experience of driver?
• Increase in the involuntary market in PA
  (Voluntary market results appear better)?
• Luck?
• What else?