1. Personal Auto Special Reserving Issues Casualty Loss Reserve Seminar September 11, By 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