Private Passenger Automobile. Analysis of No-Fault Legislative Reforms. Michigan. On Behalf of the Insurance Institute of Michigan

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1 Private Passenger Automobile Analysis of No-Fault Legislative Reforms Michigan On Behalf of the Insurance Institute of Michigan by Michael J. Miller, FCAS, MAAA EPIC Consulting, LLC June 2007

2 Private Passenger Automobile Michigan No-Fault Legislative Reforms Purpose EPIC Consulting, LLC (EPIC) was retained by the Insurance Institute of Michigan (IIM) to perform an actuarial analysis of the claim costs and rate level impacts of two potential No- Fault legislative reforms in Michigan as applied to private passenger automobiles. One analysis addressed the impact of offering Personal Injury Protection (PIP) for private passenger auto insurance with a variety of optional benefit levels. The second analysis addressed the impact of implementing medical fee schedules for personal auto PIP claims that would be based upon existing Michigan workers compensation fee schedules. Distribution and Use This report and the opinions and conclusions contained herein have been prepared for use by IIM. We understand that IIM may have need to publicly distribute this report. Such release is permitted if the report is released in its entirety, rather than selected excerpts. All recipients of this report should be made aware that EPIC is available to answer questions regarding the analyses. Reliances and Limitations EPIC s analyses have been primarily based on Michigan-specific data and information provided by certain members of IIM. EPIC relied on these data and information without independent audit or verification for accuracy. However, the review of the data supplied by each data provider indicates a significant degree of consistency between the providers, thereby making us confident that the data are reasonably accurate and reliable for the purposes of the analyses. EPIC s analyses have been developed for the sole purpose of evaluating the potential industry-average impact on loss costs and personal auto insurance premiums of two legislative reforms of Michigan s auto PIP coverage. The report is not intended to be used as an indication of any rate level change for any specific insurer. The cost impact of these legislative reforms will likely vary from insurer to insurer due to differences in the underlying mix of business, or differences in current claim settlement practices, or differences in current rate adequacy. 2

3 EPIC was not asked to test, nor did it test, the adequacy of current industry-average rate levels for the PIP coverage in Michigan. To the extent that current average PIP rates are not adequate, EPIC s estimated premium savings may not be the appropriate rate level change. EPIC s estimate of premium savings arising from the legislative reforms would represent appropriate rate reductions only if current PIP rates are adequate to cover current loss and expense levels. EPIC has made no attempt to anticipate individual insurer s future pricing decisions in the competitive Michigan auto insurance market. EPIC s estimated PIP premium savings do not address whether the indicated premium savings will be accomplished through elimination of the prospective assessment of the Michigan Catastrophic Claims Association (MCCA), or through a reduction in the primary PIP premium, or a combination of both. The actual cost and premium impact arising from the two legislative reforms analyzed may be materially different from EPIC s estimates. However, EPIC s estimates have been based on generally accepted actuarial practices and the estimates are believed to be reasonable and reliable. Summary of Major Findings If the optional benefit levels is the only reform introduced, the PIP premium savings are estimated to range from 25% to 45%, depending on the benefit level selected. If the workers compensation medical fee schedule is the only reform introduced, the PIP premium savings are estimated to be approximately 34%. The savings arising from introducing both the optional benefit levels and the medical fee schedule cannot be calculated by simply adding the estimated total savings amounts for each reform. Losses eliminated by the benefit level caps cannot also be eliminated by the fee schedule, and vice versa. The combined savings in the following Summary Table account for the interaction of the two reform measures and range from approximately 34% to 60%, depending on the benefit level selected. 3

4 Summary Table: Premium Savings Total Benefit Level New Optional Benefits PIP Premium Savings Fee Schedule Combined Savings All-Coverage Premium Savings New Optional Benefits Fee Schedule Combined Savings Uncapped 0% 34.1% 34.1% 0% 11.9% 11.9% $400, % 32.0% 48.2% 8.8% 11.2% 16.9% $300, % 31.6% 49.0% 9.3% 11.1% 17.1% $200, % 31.3% 51.6% 10.8% 11.0% 18.0% $100, % 30.6% 55.0% 12.9% 10.7% 19.3% $50, % 30.0% 60.2% 15.8% 10.5% 21.1% Analysis Optional PIP Benefit Levels In Michigan the PIP coverage provides unlimited lifetime reimbursement of medical and attendant care expenses, as well as certain wage loss benefits, loss of service benefits, and survivor and funeral benefits. The database analyzed consisted of over 70,000 PIP claims. The distribution of those claims was consistent between the data providers, thereby increasing our confidence in the reliability of the data. As shown in the following Table 1, approximately 94% of the Michigan personal auto PIP claims cost under $50,000, with an average of $3,966 per claim. Only 0.5% of the personal auto PIP claims exceed $400,000, but those few claims each cost an average of $1,408,238 and constitute 42.6% of all PIP incurred losses. In other words, 0.5% of the PIP claims produce 42.6% of the PIP claim loss dollars. 4

5 Table 1: Michigan PIP Average Claim Severity and Distribution of Losses by Size of Loss Size of Claim Average Claim Severity Distribution No. of Claims Distribution Incurred Losses Under $50,000 $3, $50,001 - $100,000 70, $100,001 - $150, , $150,001 - $200, , $200,001 - $250, , $250,001 - $300, , $300,001 - $400, , Over $400,000 1,408, Total $17, EPIC has analyzed the reduction in PIP claim losses that would arise if optional benefit levels for medical and attendant care expenses were made available. We assumed that the current unlimited coverage for medical and attendant care expenses would continue to be available. Optional coverage benefit levels analyzed were $400,000, $300,000, $200,000, $100,000, and $50,000. The indicated loss savings at each optional benefit level are set forth in Column (2) of the following Table 2. Table 2: Loss Cost and Premium Impact Optional Benefit Levels (1) (2) (3) (4) (5) Total Benefit Level Medical/Attendant Care Loss Savings Total PIP Loss Savings Total PIP Premium Savings All-Coverage Premium Savings Uncapped 0% 0% 0% 0% $400, % 27.5% 25.0% 8.8% $300, % 29.2% 26.6% 9.3% $200, % 34.0% 30.9% 10.8% $100, % 40.4% 36.8% 12.9% $50, % 49.5% 45.0% 15.8% 5

6 Assuming that medical and attendant care claim losses represent approximately 90% of the total PIP losses for claims of $400,000 and greater, and approximately 80% of the total PIP losses for claims under $100,000, the optional benefit levels will reduce total PIP losses by the estimated savings shown in Column 3 of Table 2. Since claim losses do not constitute 100% of the insurance rate, a percentage reduction in claim losses will not be identical to the percentage reduction in premium. Some of the operational expenses will remain unaffected, even though benefit levels are reduced. It is estimated that 9.0% of current premium will remain unchanged as a result of any benefit level change. The rate and premium impact of any change in benefit level will be slightly less than the percentage reduction in claim losses. The estimated impact on total PIP premiums (i.e., including the MCCA assessment) for each optional benefit level is set forth in Column (4) of Table 2. It needs to be emphasized that the indicated rate reduction assumes the current rates are adequate. For example, if current PIP rates for a specific insurer in a specific geographic area were already 30% inadequate, then a further reduction of 30% to reflect benefit level reductions would be inappropriate. The degree of rate adequacy is likely to vary from insurer to insurer, causing the indicated premium savings in Column (4) of Table 2 to vary from insurer to insurer. The percentage of the total auto policy premium which is constituted by the PIP premium will also vary from insurer to insurer and from one geographic area to the next. The indicated changes in the total policy premium, assuming that on average the PIP premium equals 35% of the total policy premium, are shown in Column (5) of Table 2. Analysis Medical Fee Schedule Certain Michigan insurers provided to EPIC an analysis in which each insurer recalculated past actual PIP claims payments had the sampled claims been settled in accordance with Michigan fixed expenses (i.e., general and other acquisition expenses) are estimated to be approximately 9% of premium as an industry average. 6

7 Michigan s workers compensation medical fee schedule. Individual claims data were not provided, nor were any data provided in a manner that allowed the data to be aggregated. Based on the separate claim file studies provided, EPIC estimated the parameters necessary to derive an estimated overall savings arising from the application of Michigan s workers compensation medical fee schedule to personal auto PIP claims. Our estimated savings recognize that the workers compensation fee schedule will place limitations on payments for certain medical services, as well as limit attendant care benefits to 8 hours per day/7 days per week. The estimated analysis parameters were: a. 50% attendant care expense savings. b. 40% medical expense savings. c. PIP claims above $400,000 average 45% medical losses, 45% attendant care losses, and 10% for wage/other/survivor benefits. d. PIP claims below $400,000 average 60% medical, 20% attendant care, and 20% wage/other/survivor benefits. If the only no-fault reform is the introduction of the workers compensation fee schedule, the PIP savings (i.e., averaged across the full range of PIP claims by size of claim) will be as follows: Total PIP Loss Savings 37.5% Total PIP Premium Savings 34.1% All-Coverage Average Premium Savings 11.9% Because the proportion of PIP loss payments due to medical, attendant care, and wage/other varies by size of the total PIP claim, the effect of the workers compensation fee schedule also varies by size of PIP claim. As shown in the following Table 3, the workers compensation fee schedule will reduce PIP losses by as much as 40% for those PIP claims which cost $400,000 or greater. 7

8 Table 3: PIP Loss Savings by Size of Loss Workers Compensation Fee Schedule Size of PIP Loss PIP Loss Savings $400,000 and greater 40.5% $300,000 - $400, % $200,000 - $300, % $100,000 - $200, % $50,000 - $100, % $50,000 and under 33.0% Average Loss 37.5% Analysis Combined Benefit Cap and Medical Fee Schedule If both the medical fee schedule and the optional lower benefit levels are introduced, the combined effect of the two reforms will vary by the benefit level selected by the insured. It would be a mistake to determine the aggregate savings of the two reforms by simply adding the estimated total savings amounts for each reform. Losses eliminated by the benefit level caps cannot also be eliminated by the fee schedule, and vice versa. The following Table 4 presents the combined savings of the two reforms. The combined savings were calculated by allowing the benefit level caps to eliminate all the losses above the optional cap and then applying the medical fee schedule savings to the losses that remain below the benefit level cap. The savings in Column (3) of Table 4 represent the medical fee schedule savings for losses below the cap. As shown in Table 3 the impact of the medical fee schedule does vary by layer of loss and that variance has been reflected in Column (3) of Table 4. 8

9 Table 4: Loss and Premium Impact Combined Reforms (1) (2) (3) (4) (5) (6) Optional Benefit Level Benefit Level Loss Savings Fee Schedule Savings Combined PIP Loss Savings Total PIP Premium Savings All-Coverage Premium Savings Uncapped 0% 37.5% 37.5% 34.1% 11.9% $400, % 35.2% 53.0% 48.2% 16.9% $300, % 34.7% 53.8% 49.0% 17.1% $200, % 34.4% 56.7% 51.6% 18.0% $100, % 33.6% 60.4% 55.0% 19.3% $50, % 33.0% 66.2% 60.2% 21.1% The premium savings in column (5) of Table 4 reflect an estimate the 9% of the PIP premium is unaffected by a change in losses. The all-coverage premium impact in Column (6) of Table 4 reflects an estimate that the PIP premium represents 35% of the typical package of auto coverages purchased. Again, we emphasize that the estimated premium savings should only be applied to a current PIP premium which is actuarially adequate. 9