Agenda

1. Personal Auto Special Reserving IssuesCasualty Loss Reserve SeminarSeptember 11, 2006By Bill Carpenter

2. Agenda • Why discuss Auto Physical Damage … • Benchmarking / Adding Value • Estimating Salvage / Subrogation Recoverables

3. Why Auto Physical Damage ? What is this negative development?

4. Even With Paid Losses ? Yes … after 24 months. Usually after 15 months if it were shown here

5. Removing Salvage / Subrogation Back to a “normal” pattern

6. 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.

7. 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

8. Agenda • Why discuss Auto Physical Damage … • Benchmarking / Adding Value

9. Adding Value • Job 1 is “getting it right” for the reserving actuary • But … also look for the opportunity to add value in other ways

10. 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

11. A Chance to Play Offense Instead of reacting to losses on defense, subrogation provides the opportunity for a company to play offense

12. Benchmarking Your Team

13. 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

14. The Opportunity for Improvement

15. 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

16. Agenda • Why discuss Auto Physical Damage … • Benchmarking / Adding Value • Estimating Salvage / Subrogation Recoverables

17. Estimating Recoverables • Best methods – calculate directly from salvage / subrogation data • Other methods • Allocation methods

18. Salvage Received Triangle

19. Calculate Age to Age Factors

20. Calculate Ultimate Salvage

21. 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)

22. Recoverables by Coverage – Allocation Method

23. 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

24. Incremental Received to Paid Ratios This example is typical with incremental received to paid ratios increasing consistently for several annual periods

25. Questions / Comments