1. Auto Insurance Success Stories Casualty Loss Reserve Seminar September 12-14, 2005

2. PENNSYLVANIA ACT 6: A RETROSPECTIVE REVIEW Casualty Loss Reserve Seminar September 12-14, 2005 By Kevin Russell, FCAS ERIE INSURANCE GROUP

3. Part 1: Originally Presented as Auto Managed Care: Pennsylvanias Act 6 of 1990 By Chet Szczepanski

4. Agenda n Review economic and social background leading to Act 6 n Review legislative background leading to Act 6 n Review specifics of Act 6 n Examine loss cost saving effects of medical cost containment features implemented by Act 6 n Examine impact on loss development and reserving

5. Economic & Social Background n Climate of the 1970s and 1980s: –High rates of inflation throughout period, especially medical inflation –Society becoming increasingly litigious, particularly in large population centers such as Philadelphia

6. Economic & Social Background (continued) n Insurance Marketplace in the 1970s and 1980s –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

7. Legislative Background n July 19, 1974: Legislature enacts Pennsylvania No-Fault Motor Vehicle Insurance Act –Key Features: n Unlimited Medical Coverage n $750 Monetary Threshold to Bring Suit

8. 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

9. Legislative Background (Continued) n October 1, 1984: Pennsylvania Legislature repeals No-Fault Motor Vehicle Insurance Act and enacts Motor Vehicle Financial Responsibility Law n Key Features: n Tort System with add-on First Party Benefits n Medical Coverage now limited (minimum limit $10,000 Medical Benefits)

10. Legislative Background (Continued) n 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 dont have a cat, what do I need a Cat Fund for?

11. Legislative Background (Continued) n 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 n Combined effects of increased suit activity and accelerating inflation leads to even greater and more frequent rate increases

12. Legislative Background (Continued) n Governor Robert P. Casey takes office in January, 1987 n A populist governor, he makes auto insurance reform one of his major legislative goals

13. Legislative Background (Continued) n 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 n Caseys proposal fails to gain substantive support from any constituency

14. Legislative Background (Continued) n 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

15. Legislative Background (Continued) n December 12, 1988: Pennsylvania Legislature Repeals Automobile Catastrophic Loss Trust Fund n Institutes runoff of current claims to be funded by surcharge on driving violation fees n Mandates that insurance marketplace offer Extraordinary Medical Benefit Coverage for voluntary purchase n Coverage similar to original Cat Fund n Initial actuarial cost $45.00

16. Legislative Background (Continued) n February 7, 1990: Governor Casey signs into law Act 6 of 1990 which substantially modifies the Motor Vehicle Financial Responsibility Law n A Choice No-Fault System

17. Act 6 of 1990 n 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

18. Act 6 of 1990 n Key Features (continued) –Increased uninsured motorist detection efforts –Increased anti-fraud measures n Penalties for insurance fraud stiffened from a misdemeanor to a third degree felony

19. Act 6 of 1990 n 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.

20. Act 6 of 1990 n Key Features (continued) –MANDATORY RATE ROLLBACKS!

21. Constituencies (Revisited) –The Public –The Legislature –The Insurance Industry –The Trial Bar –The Medical Community

22. Chets CONCLUSIONS n Act 6 enacted because a successful coalition of constituencies formed n Act 6, especially Choice Features and Medical Cost Containment Features, a big success n Such law changes have substantial effects on actuarial analyses

23. Part 2: PENNSYLVANIA ACT 6 A RETROSPECTIVE REVIEW Updated 8/2005

24. Updated 8/2005- How Were Auto Coverages Affected? n Rollbacks: Limited vs. Full Tort Option n Lower Minimum/Optional Coverages n Mandatory Discounts/Deductibles n Utilization of Medical Fee Schedule n Elimination of Duplicate Recoveries n Coverage Restrictions on Impaired/Fraudulent Drivers

25. Update 8/2005: How Were Auto Coverages Affected? n 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

26. Update 8/2005: How Were Auto Coverages Affected? n 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)

27. Update 8/2005: How Were Auto Coverages Affected? n Mandatory Discounts/Deductibles –Coverages affected: All –Coverage Impact: n FPB: 15% passive seatbelts, 20% driver side airbag, 30% 2 airbags n Comp: 10% anti-theft devices n Comp/Coll: Mandatory $500 ded (can request lower) n All coverages: 5% for drivers 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)

28. Update 8/2005: How Were Auto Coverages Affected? n 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

29. Update 8/2005: How Were Auto Coverages Affected? n 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

30. Update 8/2005: How Were Auto Coverages Affected? n Coverage Restrictions on Impaired/ Fraudulent Drivers –Coverages affected: BI, FPB, UMUIM –Coverage Impact: n Bars recovery for drivers under the influence of drugs/ alcohol n Tougher enforcement against uninsured motorists n Auto Ins. fraud goes from misdemeanor to third degree felony offense – Loss Cost component affected: Frequency

31. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

32. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

33. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

34. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

35. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

36. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

37. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

38. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

39. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

40. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000

41. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000 Personal Vol Auto BI - PA Paid LOSS

42. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 - 2000 Personal Vol Auto No-Fault - PA Paid LOSS

43. Update 8/2005: A Retrospective Review n Erie Insurance Group 1988 – 2000 Personal Vol Auto UMUIM - PA Paid LOSS

44. First Party Benefits Arising Claim Frequency

45. First Party Benefits Average Paid Loss

46. Medical Incurred Development

47. Medical Paid Development

48. Update 8/2005: Other Factors n 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?

49. Update 8/2005: Other Factors n Increase in Gas Prices? (Source: www.bls.gov)

50. Update 8/2005: Other Factors n Increase in Gas Prices? (Source: www.bls.gov)

51. Update 8/2005: Other Factors n Annual Highway Miles Driven? (Source: www.fhwa.dot.gov)

52. Update 8/2005: Other Factors n Increase in PA Unemployment Rate? (Source: www.bls.gov)

53. Update 8/2005: Other Factors n Increase in PA Unemployment Rate? (Source: www.bls.gov)

54. Update 8/2005: Other Factors n Shift in Types of Cars Driven? (Source: www.eia.doe.gov)

55. Update 8/2005: Other Factors n 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.

56. Update 8/2005: Other Factors n 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

57. Update 8/2005: Other Factors n 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?