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Auto Insurance Success Stories. Casualty Loss Reserve Seminar September 12-14, 2005. 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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auto insurance success stories

Auto Insurance Success Stories

Casualty Loss Reserve Seminar

September 12-14, 2005

pennsylvania act 6 a retrospective review

PENNSYLVANIA ACT 6: A RETROSPECTIVE REVIEW

Casualty Loss Reserve Seminar

September 12-14, 2005

By Kevin Russell, FCAS

ERIE INSURANCE GROUP

part 1 originally presented as auto managed care pennsylvania s act 6 of 1990

Part 1: Originally Presented as“Auto Managed Care: Pennsylvania’s Act 6 of 1990”

By Chet Szczepanski

agenda
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
economic social background
Economic & Social Background
  • Climate of the 1970’s and 1980’s:
    • High rates of inflation throughout period, especially medical inflation
    • Society becoming increasingly litigious, particularly in large population centers such as Philadelphia
economic social background continued
Economic & Social Background(continued)
  • Insurance Marketplace in the 1970’s and 1980’s
    • 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
legislative background
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
legislative background continued
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
legislative background continued9
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)
legislative background continued10
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 don’t have a cat, what do I need a Cat Fund for?”
legislative background continued11
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
legislative background continued12
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
legislative background continued13
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
  • Casey’s proposal fails to gain substantive support from any constituency
legislative background continued14
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
legislative background continued15
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
legislative background continued16
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
act 6 of 1990
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
act 6 of 199018
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
act 6 of 199019
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.
act 6 of 199020
Act 6 of 1990
  • Key Features (continued)
    • MANDATORY RATE ROLLBACKS!
constituencies revisited
Constituencies (Revisited)
  • The Public
  • The Legislature
  • The Insurance Industry
  • The Trial Bar
  • The Medical Community
chet s conclusions
Chet’s 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
updated 8 2005 how were auto coverages affected
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
update 8 2005 how were auto coverages affected
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
update 8 2005 how were auto coverages affected26
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)
update 8 2005 how were auto coverages affected27
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 driver’s 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)
update 8 2005 how were auto coverages affected28
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
update 8 2005 how were auto coverages affected29
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
update 8 2005 how were auto coverages affected30
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
update 8 2005 a retrospective review
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review32
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review33
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review34
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review35
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review36
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review37
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review38
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review39
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review40
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000
update 8 2005 a retrospective review41
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000 Personal Vol Auto BI - PA Paid LOSS
update 8 2005 a retrospective review42
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 - 2000 Personal Vol Auto No-Fault - PA Paid LOSS
update 8 2005 a retrospective review43
Update 8/2005: A Retrospective Review
  • Erie Insurance Group 1988 – 2000 Personal Vol Auto UMUIM - PA Paid LOSS
update 8 2005 other factors
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?
update 8 2005 other factors49
Update 8/2005: Other Factors
  • Increase in Gas Prices? (Source: www.bls.gov)
update 8 2005 other factors50
Update 8/2005: Other Factors
  • Increase in Gas Prices? (Source: www.bls.gov)
update 8 2005 other factors51
Update 8/2005: Other Factors
  • Annual Highway Miles Driven? (Source: www.fhwa.dot.gov)
update 8 2005 other factors52
Update 8/2005: Other Factors
  • Increase in PA Unemployment Rate? (Source: www.bls.gov)
update 8 2005 other factors53
Update 8/2005: Other Factors
  • Increase in PA Unemployment Rate? (Source: www.bls.gov)
update 8 2005 other factors54
Update 8/2005: Other Factors
  • Shift in Types of Cars Driven? (Source: www.eia.doe.gov)
update 8 2005 other factors55
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.
update 8 2005 other factors56
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
update 8 2005 other factors57
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?