Personal Auto Special Reserving Issues

Casualty Loss Reserve SeminarSeptember 11, 2006

By Bill Carpenter

Agenda

Why discuss Auto Physical Damage … Benchmarking / Adding Value Estimating Salvage / Subrogation

Recoverables

Why Auto Physical Damage ?

What is this negative development?

Even With Paid Losses ?

Yes … after 24 months. Usually after 15 months if it were shown here

Removing Salvage / Subrogation

Back to a “normal” pattern

Definitions

Salvage: Damaged property an insurer takes over to reduce its loss after paying a claim.

Subrogation: The legal process by which an insurance company, after paying a loss, seeks to recover the amount of the loss from another party who is legally liable for it.

Characteristics

Total amount: $8.14 billion Most of the recoveries are from subrogation 16.8% of paid losses Develops slower than losses

All numbers are 2005 industry calendar year amounts for auto physical damage only

Agenda

Why discuss Auto Physical Damage … Benchmarking / Adding Value

Adding Value

Job 1 is “getting it right” for the reserving actuary

But … also look for the opportunity to add value in other ways

Paradox

When you are focused on the balance sheet, the danger is being viewed primarily as an expense (i.e., a drag on the income statement)

When you can contribute to reducing costs on the income statement, you will be valued as an asset

A Chance to Play Offense

Instead of reacting to losses on defense, subrogation provides the opportunity for a company to play offense

Benchmarking Your Team

Why the Differences?

Some state differences Mainly company practices– Front line adjusters

• Trained only to identify subrogation potential• Measured on numbers of referrals with potential

– Centralized subrogation unit• Work adjuster referrals• Measured on recoveries per referral and/or

recoveries per referred loss dollars

– Smaller companies without the scale to centralize can outsource

– Companies recognize the customer service value in recovering customer deductibles

The Opportunity for Improvement

Benchmarking Wrap-up

$2.5 billion potential industry opportunity– Extrapolating from top 50 company results

Represents 6.5% of auto physical damage net paid losses

Even larger opportunity for companies performing at below average levels

Higher levels contribute to customer satisfaction and retention when more deductibles are recovered

So … next time you review salvage / subrogation recoverables, compare yourself to peer companies and report the results

Agenda

Why discuss Auto Physical Damage … Benchmarking / Adding Value Estimating Salvage / Subrogation

Recoverables

Estimating Recoverables

Best methods – calculate directly from salvage / subrogation data

Other methods Allocation methods

Salvage Received Triangle

Calculate Age to Age Factors

Calculate Ultimate Salvage

Recoverables by Coverage

Split of collision / comprehensive salvage / subrogation amounts may be desired for internal purposes

Usually best to estimate directly Allocation approach is also possible– Allocate total estimated recoverable in

proportion to the amount received to date (by accident year)

Recoverables by Coverage – Allocation Method

Other Approaches

Bornheutter – Ferguson approach using paid ultimate paid losses as the denominator or exposure base

Calculate as the difference between gross and net loss projections (gross and net of salvage / subrogation)

Received to paid approach is problematic

Incremental Received to Paid Ratios

This example is typical with incremental received to paid ratios increasing consistently for several annual periods

Questions / Comments