1. 2008 Casualty Loss Reserve Seminar Session 6 – Personal Automobile Reserving September 11, 2007 San Diego, CA Presentation by John R. Forney, FCAS 1

2. Outline  History of No-Fault Auto Insurance  Data Needed to Project Unlimited Long-Term No- Fault (PIP) Reserves  Methodology  Other Considerations 2

3. History of No-Fault Auto Insurance  Theory was developed in the mid-1960’s to provide first party benefits while restricting the right to sue third parties  Sixteen (16) states and Puerto Rico adopted some form of no-fault auto insurance in the early- to mid-1970’s  Five (5) of those states have repealed their no-fault laws, although Pennsylvania passed a new no-fault law in 1990 3

4. History of No-Fault Auto Insurance  Most states provide for limited first-party medical benefits  Pennsylvania, New Jersey, and Michigan have provided unlimited first-party medical  Pennsylvania until 1984 no-fault repeal  New Jersey until 1990 reform (benefits in excess of $75K ceded to UCJF)  Michigan is still unlimited  These are the claims I will be talking about today 4

5. Long-Term PIP Claims are Unique  Traumatic Injuries  Age of claimants  Nature of expenses  Case reserving 5

6. Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves  Payments to Date  Baseline average annual payment  Future Inflation 6

7. Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves  Mortality Table  Claimant Birth Date  Sex of Claimant  Impairment 7

8. Data and Assumptions Needed to Project Unlimited Long-Term No-Fault (PIP) Reserves  Reinsurance Parameters  Retention  Limit  Co-Participation 8

9. Baseline Average Annual Payment  Historical Payments  Amounts  Nature of payments  Consistency  Less than annual, e.g. prostheses, pain medication pumps  Pharmaceuticals  Care – Who is providing?  Hospitalizations 9

10. Baseline Average Annual Payment  Discussions with Claims Department Personnel  What are the causes of historical inconsistencies?  What might change?  Any unusual payments expected?  LAE  Medical bill repricing  IME’s 10

11. Future Inflation  Very important and sensitive  Historical Medical Inflation (Medical CPI)  Nature of payments  Care  Pharmaceuticals  Hospitalizations  Utilization 11

12. Mortality  Recently Published Table  Age of Claimant  Sex of Claimant  Impairment – Rated Age 12

13. Reinsurance Parameters  Retention  Limit  Co-Participation 13

14. Methodology  Calculate annual paid for each future year using baseline and inflation rate  Calculate ceded part of annual payment  Calculate probability of survival at each age y (D y /D x ), where x=current age  Discount each annual payment for mortality (payment times D y /D x ) 14

15. Other Considerations  Reinsurance  Structured Settlements 15

16. Reinsurance Considerations  Limit – Inflation can erode limits more quickly than you think  Co-Participation in certain layers 16

17. Reinsurance Considerations  Collectibility  Direct versus Broker Market  Layers  Reporting Issues  Commutations 17

18. Structured Settlements  Provide certainty for insurer  Settlement is “discounted”  Need agreement with claimant/attorney and court approval  PA law nullifies them in certain circumstances 18

19. Questions and (Maybe) Answers 19