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Personal Auto Special Reserving Issues Casualty Loss Reserve Seminar September 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?. - PowerPoint PPT PresentationTRANSCRIPT
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