Transcript Download Handout 2

Personal Auto Special Reserving Issues
Casualty Loss Reserve Seminar
September 11, 2006
By Bill Carpenter
Agenda
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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
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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
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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
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Why discuss Auto Physical Damage …
Benchmarking / Adding Value
Adding Value
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Job 1 is “getting it right” for the reserving
actuary
But … also look for the opportunity to add
value in other ways
Paradox
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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?
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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
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$2.5 billion potential industry opportunity
– Extrapolating from top 50 company results
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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
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Why discuss Auto Physical Damage …
Benchmarking / Adding Value
Estimating Salvage / Subrogation
Recoverables
Estimating Recoverables
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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
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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
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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