Private Passenger Automobile Insurance Coverages

Transcription

1 Private Passenger Automobile Insurance Coverages An Actuarial Study of the Frequency and Cost of Claims for the State of Michigan by EPIC Consulting, LLC Principal Authors: Michael J. Miller, FCAS, MAAA Richard A. Smith, FCAS, MAAA Peer Reviewer: Klayton. Southwood, FCAS, MAAA July 2004

2 Foreword EPIC Consulting, LLC was retained to study the frequency and cost of claims data in Michigan for the private passenger automobile insurance coverages. The primary purpose of the study was to determine the degree of variation in losses by geographical area and, to the extent possible, determine whether the losses were primarily impacted by the frequency of accidents or the cost of the damage. The study and this report were sponsored by the Insurance Institute of Michigan and the Michigan Insurance Coalition. EPIC had the sole responsibility and the independence to prepare this report and to conduct the study in the way it considered to be actuarially sound. The opinions and conclusions expressed in this report are those of the individuals on EPIC s research team. In June 2004, EPIC published a an actuarial study of the frequency and cost of homeowners claims for Michigan. This auto study complements the previous homeowners study. i EPIC Consulting, LLC

3 About EPIC Consulting, LLC EPIC is a privately-held Illinois limited liability corporation. EPIC provides actuarial services to insurers, insurance regulators, and self-insured business groups. Many of EPIC s clients have been served continuously by its senior consultants for nearly twenty years. The authors of this report are principals of EPIC, Fellows of the Casualty Actuarial Society and Members of the American Academy of Actuaries. Each has been actively involved for their entire career in ratemaking for personal insurance coverages. The authors are available to answer questions about this report by calling (715) , or (309) , or by contact through the EPIC website at ii EPIC Consulting, LLC

4 Reliances and Limitations The authors have relied on the accuracy of the data provided by the ten participating insurers. The aggregate loss ratios in the study s database were compared to those published by the ational Association of Insurance Commissioners (AIC). The loss ratios in the two databases appeared to be consistent, except for the liability coverage loss ratios for 2001 and We were unable to reconcile the liability loss ratios in this study for accident-years 2001 and 2002 with the calendar-year loss ratios published by the AIC. However, this study s accident-year loss data were used for comparative purposes across geographic areas and across coverages, and for comparative purposes we judged these data to be reasonable. To the extent there are material, undetected errors in the database our conclusions could be significantly impacted. iii EPIC Consulting, LLC

5 Table of Contents Foreword...i About EPIC Consulting, LLC...ii Reliances and Limitations... iii Executive Summary...1 What the Study Is and Is ot...1 Conclusions of the Study...1 Description of the Study and Database...3 Definition of Important Terms and Concepts...4 Private Passenger Automobiles...4 Automobile Insurance Coverages...4 Comprehensive Cause of Loss...5 Claim Frequency...6 Average Cost Per Claim...6 Pure Premium...6 Premiums...7 Claim Losses...7 Loss Ratio...7 Expense Ratio...8 Profit...8 Insurance Rates...9 Analysis and Findings...10 Industrywide Data...10 Study Database Statewide...21 Geographical Loss Variation...27 Catastrophe Losses...28 Frequency, Severity and Pure Premium Bands...29 Population Density Bands...38 Territories by Coverage...41 Comprehensive Losses by Peril...41 Degree of Competition...42 Conclusions...44 TOC EPIC Consulting, LLC

6 Executive Summary What the Study Is and Is ot This is not a study of the adequacy or excessiveness of private passenger automobile insurance rates. A test of the reasonableness of rates is an insurer-by-insurer determination, because each insurer: has a unique group of insureds with unique expected losses; has unique methods of operation with unique operating expenses; and has a unique cost of capital and a unique investment portfolio which translate into a unique profit margin provision in its rates. The reasonableness of any rate schedule can only be judged on the losses and expenses which were expected at the time the rates were implemented. The reasonableness of rates cannot be judged by simply looking back at actual results for two or three years. This is a study of the private passenger automobile claim losses that actually occurred in 2000, 2001 and The goal of the study was to explain, to the extent possible, what the losses were, how often the claims occurred, where they occurred, and what perils gave rise to the losses. Conclusions of the Study The nature (i.e., claim frequencies and claim severities) of the private passenger insurance losses is significantly different for each of the seven auto coverages analyzed in this study. The claim losses vary significantly by geographical area within Michigan and these geographical variations are different for each of the seven coverages. As a general rule, geographical areas of high claim frequencies for one coverage are not areas of high claim frequencies for all coverages. Generally, areas of high claim severities for one coverage are not high cost areas for all coverages. The variation in losses by coverage and by geographical area means the private passenger auto losses and loss ratios will likely differ from one insurer to the next. Each insurer has a unique group of policyholders with respect to the location of its policyholders and the optional coverages purchased. Because of the uniqueness of each insurer s exposure to loss, judgment as to the reasonableness of rates can only be made on an insurer-by-insurer basis. The loss ratios in the study s database show little variation across the ten population density bands for the liability coverages and the physical damage coverages. The consistency in the loss ratios suggests 1 EPIC Consulting, LLC

7 that the variation in the premiums charged across the population density bands have been approximately in proportion to the variation of losses incurred. Michigan s private passenger auto loss ratio reached a high of 98.3% in 2001, ending a sustained increase since Michigan s sustained increase in the total auto loss ratio was the result of an increase in the loss ratios for the liability coverages, not the physical damage coverages. The increase in Michigan s liability loss ratios was the result of rising claim costs, rather than an increase in the frequency of claim occurrences. Underwriting profit/loss ratios in Michigan ranged from -13.1% to -35.0% during the period 1998 through Even when all investment income is considered, insurers realized only a 1.0% total return during 1998 through 2002 in Michigan. Such a return is less than an insurer could have realized had it invested its capital in a less risky business than Michigan auto insurance. 2 EPIC Consulting, LLC

8 Description of the Study and Database Data for the study were provided by the following insurers: Allstate Insurance Company AMCO Insurance Company Auto Club Insurance Association Auto-Owners Insurance Company Citizens Insurance Company of America Farm Bureau Insurance Company of Michigan Home-Owners Insurance Company orth Pointe Insurance Company Ohio Farmers Insurance Company (Westfield Group) State Farm Mutual Insurance Company The participating insurers write over 70% of Michigan s total private passenger auto insurance market, and as such, were able to provide a reliable and credible database for this analysis. Each participating insurer provided data for all its Michigan policies in effect during calendar years 2000, 2001 and The losses included in the data call were for all claims that occurred in 2000, 2001, or All losses were valued as of March 31, Data elements provided were written and earned premiums, earned car years, claim counts, and incurred claim amounts valued as of March 31, The data were summarized by coverage, zip code, limit of coverage and size of deductible. The comprehensive losses were identified by cause of loss (i.e., fire, wind/hail, vandalism, total theft, partial theft, glass, water/flood, animal collision, and all other). The three-year database included a total count of records equivalent to 12.9 million car years (i.e., one car insured for twelve months). 3 EPIC Consulting, LLC

9 Definition of Important Terms and Concepts Private Passenger Automobiles This study s database reflects only the experience of vehicles commonly referred to as private passenger automobiles. In the insurance business, private passenger automobiles include sedans, coupes, station wagons, vans, pick-up trucks, and panel trucks used for personal pleasure, family and business use. Some restrictions apply if the vehicle is used for business purposes. A vehicle used for retail or wholesale delivery, or a vehicle weighing more than 10,000 pounds, would not be included in the definition of a private passenger automobile. Also not included in the definition of private passenger automobiles are motorcycles, snowmobiles and other off-road vehicles. Automobile Insurance Coverages The following automobile insurance coverages are available in Michigan and included in the study s database. Bodily Injury (BI) liability protects the insured against monetary loss arising from legal liability for injuries to a person in an auto accident. Property Damage (PD) liability protects the insured against monetary loss resulting from legal liability for damage to property of others in an auto accident. Personal Injury Protection (PIP) pays to the insured the cost of medical, hospital, rehabilitation, loss of wages, or loss of services resulting from injury to the insured or family member in an auto accident. Property Protection (PPI) protects the insured from monetary loss resulting from his/her absolute liability for damage caused by the insured automobile in Michigan to property other than vehicles and their contents, except that it pays for damage to properly parked vehicles. 4 EPIC Consulting, LLC

10 Uninsured Motorist (UM) coverage protects the insured and family members against loss if injury is caused by an uninsured motorist. Underinsured Motorist (UIM) coverage protects the insured and family members against loss if injury is caused by a negligent insured driver with bodily injury limits lower than the limits provided under this coverage. Comprehensive coverage pays for all losses to the insured vehicle, other than damage arising from an auto accident. Examples of perils covered are theft or damage by fire, flood, hail, vandalism, or collision with an animal. Collision coverage pays for repairs to the insured vehicle if it is damaged in an automobile accident. There are three kinds of collision coverage available. Limited collision pays only if the insured is 50% or less at fault. Regular collision pays regardless of fault, with a deductible that always applies. Broad collision pays regardless of fault, but the deductible does not apply if the insured is 50% or less at fault. The BI, PD, PIP and PPI coverages are referred to as mandatory coverages because all auto insureds in Michigan are required to purchase these coverages. All other coverages are purchased at the option of the insured. In this report, references to the liability coverages are consistent with how that term is commonly used in the insurance industry. Liability coverages include BI, PD, PIP, PPI, UM and UIM. In this report, and commonly within the industry, the term physical damage coverages refers to the comprehensive and collision coverages. For simplicity of analysis, we have combined the three collision forms of coverage (i.e., broad, regular and limited) into a single collision coverage. Comprehensive Cause of Loss Insurers commonly code their comprehensive loss data so as to identify the cause of loss. This study provides separate analyses of the comprehensive losses for nine groupings of perils: fire (total and partial fire damage), total theft, partial theft, vandalism, wind/hail, water/flood, animal collision, glass/windshield, and all other. 5 EPIC Consulting, LLC

11 Claim Frequency Claim frequency is the ratio of the number of insurance claims to an exposure base. In this study the selected exposure base is one car insured for one year (i.e., earned car year). For example, a claim frequency of.150 means there were 150 claims for every 1,000 cars insured. A claim frequency of.150 can also be interpreted as a 15% chance, or likelihood, that a particular insured will incur a claim. Average Cost Per Claim The average cost of a claim is calculated as the total dollars of incurred claim losses divided by the number of claims. This value is also commonly referred to as claim severity. Pure Premium The pure premium is the average cost of claims per insured car. It is calculated as the total dollars of incurred claim losses divided by the number of insured cars. As shown in the following algebraic formula, the pure premium is the product of the claim frequency times the average cost per claim. Let: C D C/ D/C D/ = number of insured cars = number of claims = dollars of claim losses = claim frequency = average cost per claim (i.e., claim severity) = pure premium. Then: (C/) x (D/C) = D/ = Pure Premium. Since the pure premium is a combination of the probability of a claim occurring (i.e., claim frequency) and the average cost of a claim once it occurs (i.e., claim severity), it is considered as the best measure of risk for an individual insured, or for a group of insureds. An insured with an expected pure premium of $450 would be considered a higher risk than an insured with an expected pure premium of $ EPIC Consulting, LLC

12 Premiums Premiums are recorded as written premiums at the beginning of the policy term. The written premium is earned pro rata during the policy period. For example, an insurance premium of $500 for an annual policy written on December 31, 2003 will be recorded as $500 of written premium for year By June 30, 2004, the insurer will have earned one-half (i.e., $250) of the premium and will have recorded $250 of earned premium during the first six months of Claim Losses Claim losses include actual payments made to the claimants, plus amounts held in reserve for future payments on claims that have already occurred. Most private passenger auto claims are quickly paid and settled. But some claims, especially the liability claims, may not be completely settled for five years or more. The loss reserve amounts are estimates of future payments. Loss reserves change as more information becomes known and as partial payments on the claims are made. There are a variety of accounting protocols for recording claim losses. Losses can be accounted for according to the year in which the policy is written. These losses are referred to as policy-year losses. An example would be a policy written in December 2003, with a claim occurring in January In this case the loss would be considered a policy-year 2003 loss because that was the year in which the policy was written. Losses can be accounted for according to the year in which the claim occurred. These losses are referred to as accident-year losses. An example would be a policy written in December 2003 with a claim occurring in January In this case the loss would be considered an accident-year 2004 loss, even though the policy was written in Another common accounting protocol for recording claim losses is referred to as calendar-year losses. In this case any claim payments are recorded to the year in which the payments are made and any changes in the reserve for future payments are recorded to the years in which the reserve changes occur. Loss Ratio Claim losses are often expressed as a ratio to premiums. The total dollars of claim losses divided by the total dollars of premiums is a loss ratio. For example, a loss ratio of.70 (i.e., 70%) means that 70% of the premium dollars were needed to fund the payment of claim losses. 7 EPIC Consulting, LLC

13 For most rate analyses, the accepted loss ratio to analyze is an incurred loss (usually on an accidentyear basis) divided by earned premiums. A ratio of incurred losses to written premiums is hardly ever used because such a ratio will reflect a mismatch of the claim losses to the premiums used to fund the losses. An example may help clarify the mismatch problem. All policies written in 2003 will have the written premium recorded to 2003, but some claims on those policies may not be incurred until All policies written in 2004 will have the written premium recorded to 2004, but some claims on those policies may not be incurred until If one were to relate accident-year 2004 incurred losses to 2004 written premium, there would be two sources of mismatch. There would be accident-year 2004 losses in the numerator that properly tie to 2003 written premium, not to the 2004 written premiums in the denominator. There would also be 2004 written premiums in the denominator that tie to accidentyear 2005 losses, not to the 2004 losses in the numerator. Expense Ratio Expenses are often expressed as a ratio to premiums. Claim settlement expenses (e.g., legal or claim investigation expenses) related to premiums is commonly referred to as a loss adjustment expense ratio. Operational/underwriting expenses related to premiums are commonly referred to as an underwriting expense ratio. Profit There are three types of profit ratios commonly used in insurance rate analyses. Each profit measure relates to a specific portion of an insurer s overall return. The underwriting profit represents that portion of the premiums which remain after funding the claim losses and expenses. For example, if claim losses in a particular year constituted 70% of premium and all expenses totaled 25% of premium, the insurer would have experienced a 5% underwriting profit. If claim losses constituted 80% of premium and all expenses totaled 25% of premium, the insurer would have experienced a 5% underwriting loss. In addition to the underwriting profit/loss, an insurer also earns investment income while the premiums are being held to pay future claims and expenses. The investment income from premiums, 8 EPIC Consulting, LLC

14 plus the underwriting profit/loss, is commonly referred to as the operating profit. The operating profit represents the return generated by the insurance operations. Insurers are required to commit sufficient capital to guarantee the availability of funds to pay claims. These capital funds also generate investment income. The investment income from the capital funds, plus the insurance operating profit, represents the total return to the insurer. The total return must be sufficient to compensate the insurer for placing its capital at risk in the insurance operation. Insurance Rates Insurance rates are established so as to be sufficient to fund the claim losses and the expenses expected to be incurred during the time the insurance policy is in force. Expected future claim losses and expenses cannot be determined by merely looking at what actually happened in the past. For example, the fact that a house has not burned in the past does not mean the chances of a fire in the future are zero. Or, just because an insured has not experienced an automobile accident in the past several years does not reduce the likelihood of future accidents to zero. Determining these future probabilities is an actuarial process. The future likelihood of losses, as to both the expected frequency and the expected severity of claims, is the only basis for determining the reasonableness of insurance rates and the only basis for determining if rates meet the Michigan rate standards of neither excessive, inadequate, nor unfairly discriminatory. In addition to the losses and expenses, insurance rates provide for a reasonable margin for underwriting profit. The underwriting profit provision is determined so that the insurer s total expected return is consistent with the degree of risk to which the insurer s capital is exposed. Reasonable profit provisions, expense provisions and provisions for expected claim losses vary significantly among insurers, thereby making insurance ratemaking an insurer-by-insurer calculation. 9 EPIC Consulting, LLC

15 Analysis and Findings Industrywide Data The ational Association of Insurance Commissioners (AIC) annually publishes loss, expense, and profit data for each state and for each line of insurance. The AIC data for Michigan are derived from all insurers doing business in Michigan. The AIC loss ratios are calendar-year incurred losses divided by earned premiums. The premium and loss data are combined for all liability coverages and for all physical damage coverages. The sum of the liability and physical damage data are also shown as an all auto coverage total. Exhibit I shows that Michigan s private passenger auto loss ratio for all coverages combined reached a 23-year high of 98.3% in 2001, ending a sustained increase following the relatively low loss ratio of 53.1% in In a companion study of Michigan homeowners loss ratios, EPIC found exactly the same pattern of increasing loss ratios from 1993 through Total Auto Michigan Loss Ratio Exhibit I 100.0% 95.0% 90.0% 85.0% 80.0% Loss Ratio 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% Calendar Year Michigan Michigan Average 10 EPIC Consulting, LLC

16 Exhibit II shows the AIC countrywide private passenger auto loss ratios for all coverages combined. The countrywide loss ratios reached a relative high point in 2001, after relative lows in 1997 and The countrywide 2001 loss ratio was 72.7%, compared to the Michigan 2001 loss ratio of 98.3%. The increase in the countrywide loss ratios persisted only from 1998 through 2001, whereas the Michigan increase persisted from 1993 through Total Auto Countrywide Loss Ratio Exhibit II 78.0% 77.0% 76.0% 75.0% 74.0% 73.0% 72.0% Loss Ratio 71.0% 70.0% 69.0% 68.0% 67.0% 66.0% 65.0% 64.0% 63.0% 62.0% Calendar Year Countrywide Countrywide Average As shown in the following Exhibits III and IV, the increase in Michigan s total auto loss ratio which persisted from 1993 through 2001 was the result of an increase in the loss ratios for the liability coverages, not the physical damage coverages. Publicly available loss trend data indicate this increase in Michigan s liability loss ratios was the result of rising claim costs, rather than an increase in the frequency of claim occurrences. 11 EPIC Consulting, LLC

17 Auto Liability Michigan Loss Ratio Exhibit III 140.0% 130.0% 120.0% 110.0% 100.0% Loss Ratio 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% Calendar Year Michigan Michigan Average Auto Physical Damage Michigan Loss Ratio Exhibit IV 90.0% 85.0% 80.0% 75.0% Loss Ratio 70.0% 65.0% 60.0% 55.0% 50.0% Calendar Year Michigan Michigan Average 12 EPIC Consulting, LLC

18 Exhibits V(a) through (h) show the average claim severities and the claim frequencies for the BI, PIP, comprehensive and collision coverages in Michigan. These data are generated through the Fast-Track Reporting System and represent data from a significant portion of the private passenger insurance business written in Michigan. As shown in Exhibit V(a), the frequency of BI claims in Michigan is very low compared to the countrywide average claim frequency. This is because of the strength of the no-fault threshold in Michigan. There has been a decline in Michigan s BI claim frequencies since 1997 from about 3 claims per 1,000 insureds to about 2 claims per 1,000. While Michigan s BI claim frequencies have not recently changed dramatically, the average cost of BI claims has increased dramatically. Over the last three years the average increase in claim costs for BI have been approximately 5% annually. Exhibits V(c) and (d) show that the increase in PIP losses has been due to a sharp increase in the average cost of claims. While claim frequencies have remained relatively stable over the last three years, the average increase in claim costs for PIP has been approximately 12% annually. Exhibits V(e) through (h) show that average claim costs have been rising over the long term for the physical damage coverages (i.e., comprehensive and collision). However, the increase in average claim costs has been offset by a decrease in the frequency of physical damage claims. Overall, we find that the sustained increase in Michigan s total auto loss ratio from 1993 through 2001 was primarily due to an increase in the liability loss ratios, which were impacted primarily from an increase in average claim costs, rather than any increase in the frequency of claim occurrence. 13 EPIC Consulting, LLC

19 Exhibit V(a) Bodily Injury Liability Claim Frequency per 1,000 Exposures Paid Claim Frequency Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide Exhibit V(b) Bodily Injury Liability Average Claim Severity $35,000 $30,000 Average Claim Severity $25,000 $20,000 $15,000 $10,000 $5,000 $ Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide 14 EPIC Consulting, LLC

20 Personal Injury Protection Claim Frequency per 1,000 Exposures Exhibit V(c) Paid Claim Frequency Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide Personal Injury Protection Average Claim Severity Exhibit V(d) $25,000 $20,000 Average Claim Severity $15,000 $10,000 $5,000 $ Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide 15 EPIC Consulting, LLC

21 Comprehensive Claim Frequency per 1,000 Exposures Exhibit V(e) Paid Claim Frequency Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide Comprehensive Average Claim Severity Exhibit V(f) $1,200 $1,000 Average Claim Severity $800 $600 $400 $200 $ Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide 16 EPIC Consulting, LLC

22 Collision Claim Frequency per 1,000 Exposures Exhibit V(g) Paid Claim Frequency Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide Collision Average Claim Severity Exhibit V(h) $3,000 $2,500 Average Claim Severity $2,000 $1,500 $1,000 $500 $ Period (Year Ending Quarter) Source: ISO/AII Private Passenger Fast Track Data Michigan Countrywide 17 EPIC Consulting, LLC

23 Exhibit VI presents the underwriting profit ratios published by the AIC. As previously described, the underwriting profit is equal to earned premiums minus incurred losses and minus incurred expenses. In 1993, when Michigan s auto loss ratio was at its lowest, the Michigan auto earned premium exceeded the total of incurred losses and expenses by 18.8% (i.e., underwriting profit ratio of 18.8%). In each year from 1993 through 2002, the Michigan auto earned premiums were insufficient to fund the incurred losses and expenses. The underwriting losses were especially significant from 1998 through 2002 (the latest available data). Underwriting profit/loss ratios ranged from -13.1% to -35.0% during the period 1998 through As shown in Exhibits VII and VIII, the auto underwriting loss has been primarily a result of losses on the liability coverages. In the period 1998 through 2002, the liability coverages in Michigan were especially unprofitable with underwriting loss ratios ranging from -37.9% to -81.2%. Total Auto Michigan Underwriting Profit Exhibit VI 25.0% 20.0% 15.0% 10.0% 5.0% Underwriting Profit 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% -40.0% Calendar Year Michigan Michigan Average 18 EPIC Consulting, LLC

24 Auto Liability Michigan Underwriting Profit Exhibit VII 30.0% 20.0% 10.0% 0.0% -10.0% Underwriting Profit -20.0% -30.0% -40.0% -50.0% -60.0% -70.0% -80.0% -90.0% Calendar Year Michigan Michigan Average Auto Physical Damage Michigan Underwriting Profit Exhibit VIII 20.0% 10.0% Underwriting Profit 0.0% -10.0% -20.0% -30.0% Calendar Year Michigan Michigan Average 19 EPIC Consulting, LLC

25 For comparison purposes, Exhibit IX presents the total auto underwriting profit/loss ratios published by the AIC. While the countrywide data also show underwriting losses in the period 1998 through 2002 (i.e., range of -1.5% to -11.6%), those underwriting losses were low in comparison to Michigan s losses. During the period 1980 through 2002, Michigan has experienced a total auto average underwriting loss of -12.0%, while the countrywide average underwriting loss was -5.2% for the same time period. Total Auto Countrywide Underwriting Profit Exhibit IX 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Underwriting Profit -4.0% -5.0% -6.0% -7.0% -8.0% -9.0% -10.0% -11.0% -12.0% -13.0% -14.0% Calendar Year Countrywide Countrywide Average We acknowledge that underwriting profit ratios represent an incomplete picture of an insurer s returns. Obviously missing in the underwriting profit calculation is the income from investments. According to the AIC, total returns (i.e., underwriting profit plus investment income on policyholder supplied funds and capital/surplus) in Michigan were negative in 2001 and 2002 and positive in During this five-year period ( ) of especially bad underwriting losses, the average total return was only 1.0%. Such a return is less than an insurer could have realized had it invested its capital in a less risky business than Michigan auto insurance. 20 EPIC Consulting, LLC

26 Study Database Statewide Tables 1 through 10 summarize the premium and loss data in the study s database for each auto insurance coverage. Table 1 Bodily Injury Liability Earned Incurred Average Car Earned Incurred Incurred Loss Claim Claim Pure Year Years Premiums Losses Claims Ratio Frequency Severity Premium ,291,861 $404,303,615 $238,270,537 7, % $31,660 $ ,346, ,374, ,436,807 6, % , ,331, ,782, ,203,952 7, % , Total 12,969,732 $1,232,461,155 $588,911,297 21, % $27,468 $45 Table 2 Property Damage Liability Earned Incurred Average Car Earned Incurred Incurred Loss Claim Claim Pure Year Years Premiums Losses Claims Ratio Frequency Severity Premium ,291,184 $33,972,877 $25,689,107 19, % $1,322 $ ,345,252 36,226,027 25,684,984 19, % , ,330,660 40,209,142 26,481,871 19, % ,341 6 Total 12,967,096 $110,408,046 $77,855,962 58, % $1,328 $6 Table 3 Personal Injury Protection Earned Incurred Average Car Earned Incurred Incurred Loss Claim Claim Pure Year Years Premiums Losses Claims Ratio Frequency Severity Premium ,294,264 $611,823,689 $773,558,233 34, % $22,358 $ ,348, ,007, ,215,894 36, % , ,334, ,254, ,727,285 37, % , Total 12,977,012 $2,075,085,214 $2,195,501, , % $20,093 $ EPIC Consulting, LLC

27 Table 4 Property Protection Earned Incurred Average Car Earned Incurred Incurred Loss Claim Claim Pure Year Years Premiums Losses Claims Ratio Frequency Severity Premium ,226,465 $59,225,284 $44,603,512 30, % $1,485 $ ,271,082 62,745,746 48,312,383 30, % , ,247,890 69,819,338 47,679,474 29, % , Total 12,745,438 $191,790,368 $140,595,369 89, % $1,570 $11 Table 5 UM/UIM Earned Incurred Average Car Earned Incurred Incurred Loss Claim Claim Pure Year Years Premiums Losses Claims Ratio Frequency Severity Premium ,100,606 $58,022,257 $28,849,258 1, % $26,937 $ ,176,405 59,681,520 25,777,152 1, % , ,175,833 61,554,004 14,835, % ,591 4 Total 12,452,844 $179,257,780 $69,462,206 2, % $23,870 $6 Table 6 Total Liability Incurred Earned Incurred Incurred Loss Year Premiums Losses Claims Ratio 2000 $1,167,347,722 $1,110,970,648 92, % ,211,035,766 1,063,427,220 94, % ,410,619, ,928,378 94, % Total $3,789,002,562 $3,072,326, , % 22 EPIC Consulting, LLC

28 Table 7 Comprehensive Earned Incurred Average Car Earned Incurred Incurred Loss Claim Claim Pure Year Years Premiums Losses Claims Ratio Frequency Severity Premium ,680,511 $531,139,519 $361,696, , % $888 $ ,751, ,519, ,108, , % ,738, ,056, ,922, , % Total 11,170,002 $1,619,716,030 $1,106,727,262 1,258, % $879 $99 Table 8 Collision Earned Incurred Average Car Earned Incurred Incurred Loss Claim Claim Pure Year Years Premiums Losses Claims Ratio Frequency Severity Premium ,412,519 $1,301,325,032 $936,448, , % $2,307 $ ,478,157 1,372,003, ,361, , % , ,454,776 1,446,402, ,431, , % , Total 10,345,452 $4,119,731,249 $2,892,241,168 1,214, % $2,382 $280 Table 9 Total Physical Damage Incurred Earned Incurred Incurred Loss Year Premiums Losses Claims Ratio 2000 $1,832,464,550 $1,298,144, , % ,912,522,945 1,352,470, , % ,994,459,784 1,348,353, , % Total $5,739,447,279 $3,998,968,430 2,473, % 23 EPIC Consulting, LLC

29 Table 10 All Coverage Total Incurred Earned Incurred Incurred Loss Year Premiums Losses Claims Ratio 2000 $2,999,812,272 $2,409,115, , % ,123,558,711 2,415,897, , % ,405,078,857 2,246,282, , % Total $9,528,449,841 $7,071,294,676 2,754, % The loss data in the above Tables 1 10 are accident-year incurred losses valued as of March 31, ot all the claims in the database have been completely settled and almost certainly there will be adjustments in the amounts held in reserve for future payments of these claims. Most of the future change in the loss ratios will occur in the liability coverages because those claims usually take longer to settle than do the physical damage claims. The largest increase in the loss ratios will occur in accident-year 2002 because the 2002 claims were the most immature as of the loss evaluation date of March 31, There will also be a significant change in the 2001 loss ratios, but that change will be less than the change for The least change in the loss ratios will be for accident-year 2000, because proportionately more of the 2000 claims had been settled by the March 31, 2003 valuation date. Because much of this study deals with a comparison of losses (e.g., one geographic area compared to another), we concluded there was no need to adjust the accident-year losses in this study to their estimated, ultimate levels. The accident-year losses used in the comparison analyses are equally mature, or equally immature as the case may be. All losses are valued at the same March 31, 2003 valuation date. If this study were an analysis of rate level adequacy or reasonableness, then the accident-year loss ratios would have required adjustment to their estimated, ultimate levels. Readers of this study should not conclude from Tables 1 10 that loss ratios were generally improving (i.e., decreasing) during the period Readers must be aware that the most recent accident-years in the study s database are the most immature and that those loss ratios will increase significantly as more of the claims are settled. 24 EPIC Consulting, LLC

30 Solely for data editing purposes, we did adjust the statewide accident-year loss ratios for the liability package of coverages and for the physical damage package of coverages to their estimated, ultimate levels. The AIC publishes Michigan-specific premium and loss data for the liability and physical damage packages of coverage. The AIC incurred losses are recorded on a calendar-year basis and the incurred losses in this study s database are recorded to the year in which the loss was incurred (i.e., accident-year). The two methods of accounting do not increase or decrease the amount of losses over the long-run. The difference in the two accounting methods is entirely one of timing as to which year the loss is recorded. This difference in timing means that we cannot expect the accident-year loss ratio for a specific year in the study s database to precisely match the AIC s calendar-year loss ratio for that same year. However, after adjusting the accident-year loss ratios to their estimated, ultimate level we anticipated the adjusted (i.e., estimated ultimate) accident-year loss ratios would be reasonably close to the AIC s calendar-year loss ratios. Exactly how the accident-year loss reserves and loss ratios will develop in the future will vary significantly from insurer to insurer. That is one reason why rate adequacy must be judged on an insurer-by-insurer basis. Since the study s database did not provide sufficient data for a reliable estimate of future loss reserve changes for each participating insurer, or for the participating insurers as a whole, we relied on publicly available loss reserve development data, and judgment, to develop the adjusted loss ratios shown below. The adjusted loss ratios are estimates of the loss ratios we expect when all the claims in the study s database for accident-years 2000, 2001 and 2002 are completely settled. Table 11 Comparison of Liability Loss Ratios Study s Database Year AIC Actual Adjusted % 95.2% 97.1% % 87.8% 95.7% % 63.7% 83.5% Average 117.0% 81.1% 91.6% 25 EPIC Consulting, LLC

31 Table 12 Comparison of Physical Damage Loss Ratios Study s Database Year AIC Actual Adjusted % 70.8% 70.8% % 70.7% 71.4% % 67.6% 74.4% Average 70.4% 69.7% 72.2% Table 13 Comparison of Total Auto Loss Ratios Study s Database Year AIC Actual Adjusted % 80.3% 81.0% % 77.3% 80.8% % 66.0% 78.1% Average 89.9% 74.2% 79.9% There is a great deal of similarity in the physical damage adjusted loss ratios for this study and the AIC s calendar-year loss ratios. This consistency between the adjusted accident-year loss ratios and calendar-year loss ratios is to be expected because physical damage claims are settled relatively quickly and there is relatively little future development in accident-year loss ratios for the physical damage coverages. With respect to the liability coverages, the accident-year 2000 loss ratio from the study s database is reasonably consistent with the AIC s calendar-year 2000 loss ratio. We did observe significant differences between the study s accident-year loss ratios and the AIC calendar-year loss ratios for 2001 and The possible reasons for the inconsistency in these loss ratios are: 1) we have underestimated the future upward development of the liability loss ratios for accidentyears 2001 and 2002, or 26 EPIC Consulting, LLC

32 2) paid and reserved losses for accident-years 2001 and 2002 have been underreported to us for this study, or 3) during calendar-years 2001 and 2002, the insurance industry strengthened loss reserves for accidents occurring prior to 2000, thereby increasing the calendar-year loss ratios for 2001 and Such a change in reserves would have no impact on the losses reported for this study. If this study had been designed to study rate level adequacy or rate reasonableness, we would have needed to further pursue the apparent differences between the study s 2001 and 2002 liability loss ratios and the calendar-year loss ratios published by the AIC. Since this study is primarily a study of the trend in claim frequencies and average claim severities, and comparisons of losses from one geographical area to another, we judged that further reconciliation efforts of the two sets of loss ratios were unnecessary. If there was an underreporting of losses for this study, we would expect the underreporting to be uniform across the state and not bias the comparisons of claim frequencies, claim severities and pure premiums across the geographical areas within Michigan. Geographical Loss Variation Auto insurance losses vary geographically. The geographical variation is different for each coverage (i.e., BI, PD, PIP, PPI, UM, comprehensive and collision). How to best analyze this geographical variation in losses and present the results, represented a formidable challenge to this study. There exist no standard, or benchmark, territory definitions in Michigan which insurers use to assess the risk and price the private passenger auto insurance coverages. We analyzed the rating territories used by eight leading auto insurers and found a great difference in how these insurers define their respective rating territories. This significant divergence in how rating territories are defined, and how insurers assess geographic risk, is not surprising in this highly competitive marketplace. Lacking a commonly used means of geographically subdividing Michigan s loss data, we proceeded with this analysis using five different types of geographical subdivisions of the data. 1) We ranked each zip code from high to low based on its claim frequency and aggregated the loss data into ten claim frequency bands. Frequency bands were created separately for each coverage. Maps of the frequency bands are presented in Appendix A. 27 EPIC Consulting, LLC

33 2) We ranked each zip code from high to low based on its claim severity and aggregated the loss data into ten claim severity bands. Severity bands were created separately for each coverage. Maps of the severity bands are presented in Appendix B. 3) We ranked each zip code from high to low based on its pure premium and aggregated the loss data into ten pure premium bands. Pure premium bands were created separately for each coverage. Maps of the pure premium bands are presented in Appendix C. 4) We aggregated the data for each form of the coverage by zip code into ten groups based on the population density of each zip code. The population density for each zip code was determined by U.S. Census data. A map of the population density bands is presented in Appendix D. 5) Utilizing the loss data for each coverage, we grouped zip codes that were most similar in the risk of loss for each coverage. The maps of the territories for PIP, Comprehensive and Collision are presented in Appendices E, F and G. Catastrophe Losses Auto insurance is susceptible to the occurrence of a cluster of weather-related claims affecting the comprehensive coverage, or to single, jumbo claims arising from BI, PIP or UM/UIM coverages. These catastrophe and jumbo claims can distort the losses in the year of occurrence. Actuaries ordinarily remove these losses from the historical data and substitute long-term averages for these types of claims. The way the data were provided for this study did not permit the identification of every catastrophe or jumbo claim which occurred in the experience period. However, we were able to identify at least some catastrophe losses. For the comprehensive coverage we identified a cluster of weatherrelated claims (i.e., 1,203) which occurred on 5/9/2000 and 6/9/2000. In addition to removing the weather-related catastrophe claims we also limited the size of individual claims to $50,000 for the BI, PIP and UM coverages. The physical damage coverages were limited to $15,000 for a single claim. Capping the size of individual losses eliminated the potential for a single, jumbo claim causing an unusual distortion in the loss experience for a zip code or geographical band. 28 EPIC Consulting, LLC

34 In our judgment, the removal of these catastrophe and jumbo claims permitted a more reliable comparison of the losses across the geographical bands without the potential for distortions in the data which can arise when a period as short as three years is being analyzed. Frequency, Severity and Pure Premium Bands One of the participating insurers could not provide its data with losses identified by zip code. Without losses identified by zip code, we were forced to exclude this insurer s data from the analysis of the frequency, severity and pure premium bands (also excluded from the population density bands). Data from nine of the participating insurers are summarized for each coverage in Exhibits X through XVI. Exhibit X shows that the geographical area with the highest BI frequency also has the highest PD, PIP, UM and collision frequencies. The band with the highest BI frequency has the lowest BI claim severity. Even with a capping of individual BI claims, we find a significant geographical variation in the average cost of BI claims (i.e., a high of $24,040 and a low of $10,052). The pattern of geographical variation of BI claim costs does not duplicate the pattern of variation for the other coverages. The area with the highest BI claim severity also has the highest UM severity and the highest PIP severity, but the UM and PIP severities are relatively constant across the remaining nine BI severity bands. Exhibit XI shows significant geographical variation in PD claim frequencies and claim severities. Areas of high PD claim frequencies tend to also have relatively high frequencies of BI and collision claims. Areas of relatively high PD claim severities tend to have relatively low BI claim severities. Exhibit XII shows areas of relatively high PIP claim frequencies are also relatively high areas of claim frequencies for BI, UM, and collision. Areas of relatively high PIP claim costs are also relatively high cost areas for BI. Exhibit XIII shows that the geographical variation in PPI claim frequencies are inversely related to the claim frequencies of the other coverages, with the exception of collision. The geographical variation in PPI claim severities is inversely related to the claim severities for PD and UM. Exhibit XIV shows that geographical areas with high UM claim frequencies tend to also have relatively high claim frequencies for BI, PIP and collision. Surprisingly, areas with high UM claim severities are not also areas with high claim severities for BI and PIP. We expected more similarity 29 EPIC Consulting, LLC

35 between these three coverages because the coverages pertain to the injuries to people. The costdrivers for the UM coverage are not also impacting the claim severities for BI and PIP. This may suggest that the cost of a UM claim is driven more by the unique claim settlement process for UM, than by the actual injuries. Exhibit XV shows significant geographical variation for both the comprehensive claim frequency and claim severity. There appears to be little connection between the frequency of comprehensive claims and the frequency of claims for the other coverages. Areas of high claim severities for the comprehensive coverage tend to be high cost areas for PIP and PPI. Exhibit XVI shows that areas of high collision claim frequencies also tend to have relatively high BI, PIP and UM claim frequencies. The areas with the highest collision claim severities also have relatively high PIP, PPI and comprehensive severities. We find some relationships between the claim frequencies for the individual coverages, especially between BI, PIP, UM, and collision. But as a general rule, we cannot conclude that areas of high claim frequencies for one coverage imply high claim frequencies for all coverages. or can we generally conclude that areas of relatively high claim severities for one coverage imply relatively high claim severities for all coverages. This variation in the nature of the losses for each coverage makes it difficult to compare the private passenger auto losses from one insurer to the next. Each insurer s loss experience will be dependent upon where its insureds are concentrated geographically and what optional coverages are being purchased. The variation in the nature of the losses for each coverage also means that the territory rate factors (i.e., rate differentials between rating territories) will vary substantially from one coverage to the next. A geographical territory that is high-rated for one coverage may not be high-rated for another coverage. Appendices A, B, C are maps of the frequency, severity and pure premium bands for each coverage. The maps in Appendices A, B, C relate to the data presented in Exhibits X through XVI. 30 EPIC Consulting, LLC

36 Exhibit X DATA BY FREQUECY, SEVERITY, AD PURE PREMIUM BAD BODILY IJURY PREMIUM & CLAIM DATA BY FREQUECY BAD Frequency by Coverage Personal Personal Frequency Earned Incurred Loss Pure Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Damage Insurance Protection Motorists Comprehensive Collision 1 141,552,255 58,516, % , ,198,569 47,453, % , ,839,474 41,214, % , ,541,419 38,783, % , ,414,889 37,367, % , ,352,389 35,771, % , ,316,720 31,940, % , ,820,002 27,698, % , ,130,160 26,857, % , ,893,397 20,320, % , State 1,169,059, ,925, % , PREMIUM & CLAIM DATA BY SEVERITY BAD Severity by Coverage Personal Personal Severity Earned Incurred Loss Pure Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Damage Insurance Protection Motorists Comprehensive Collision 1 107,790,633 44,498, % , ,505 10,020 1,428 22, , ,132,872 42,974, % , ,364 9,582 1,498 19, , ,091,037 39,136, % , ,121 8,625 1,605 17, , ,287,578 34,955, % , ,259 9,010 1,622 15, , ,916,594 37,728, % , ,179 9,458 1,576 17, , ,983,200 39,080, % , ,265 9,216 1,619 16, , ,832,981 37,345, % , ,339 9,431 1,847 16, , ,775,921 35,882, % , ,372 9,362 1,491 17,105 1,000 2, ,777,782 33,948, % , ,532 9,551 1,659 17, , ,470,678 20,375, % , ,777 9,544 1,451 18, ,284 State 1,169,059, ,925, % , ,370 9,373 1,581 17, ,326 PREMIUM & CLAIM DATA BY PURE PREMIUM BAD Pure Premium by Coverage Pure Personal Personal Premium Earned Incurred Loss Pure Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Damage Insurance Protection Motorists Comprehensive Collision 1 118,758,968 57,277, % , ,692,211 48,613, % , ,352,048 43,224, % , ,362,212 39,244, % , ,022,232 38,799, % , ,445,038 35,063, % , ,211,278 32,571, % , ,180,413 30,470, % , ,579,174 26,028, % , ,455,702 14,630, % , State 1,169,059, ,925, % , EPIC Consulting, LLC

37 Exhibit XI DATA BY FREQUECY, SEVERITY, AD PURE PREMIUM BAD PROPERTY DAMAGE PREMIUM & CLAIM DATA BY FREQUECY BAD Frequency by Coverage Personal Personal Frequency Earned Incurred Loss Pure Bodily Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Protection Insurance Motorists Comprehensive Collision 1 10,852,813 15,576, % , ,629,742 8,405, % , ,432,987 7,046, % , ,365,993 7,163, % , ,320,977 5,913, % , ,209,955 6,324, % , ,895,820 6,565, % , ,154,489 5,973, % , ,775,968 5,365, % , ,348,772 4,088, % , State 102,987,516 72,423, % , PREMIUM & CLAIM DATA BY SEVERITY BAD Severity by Coverage Personal Personal Severity Earned Incurred Loss Pure Bodily Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Protection Insurance Motorists Comprehensive Collision 1 8,962,401 15,034, % , ,617 10,539 1,303 20, , ,045,340 8,818, % , ,360 9,651 1,388 17, , ,336,751 7,078, % , ,970 9,543 1,395 20, , ,338,020 7,287, % , ,219 9,468 1,638 17, , ,011,740 6,582, % , ,757 9,421 1,478 18, , ,016,583 7,150, % , ,838 8,614 1,764 17, , ,380,989 5,847, % , ,197 9,521 1,558 17, , ,090,509 5,537, % , ,000 8,981 1,796 15, , ,588,347 5,450, % ,126 9,007 1,788 16, , ,216,835 3,634, % ,912 9,357 1,742 16,829 1,054 2,420 State 102,987,516 72,423, % , ,946 9,373 1,581 17, ,326 PREMIUM & CLAIM DATA BY PURE PREMIUM BAD Pure Premium by Coverage Pure Personal Personal Premium Earned Incurred Loss Pure Bodily Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Protection Insurance Motorists Comprehensive Collision 1 10,360,823 18,428, % , ,430,465 9,232, % , ,321,254 7,774, % , ,385,527 7,061, % , ,755,240 6,535, % , ,425,592 5,973, % , ,958,843 5,404, % , ,294,896 4,795, % , ,563,443 4,311, % ,491,433 2,905, % State 102,987,516 72,423, % , EPIC Consulting, LLC

38 Exhibit XII DATA BY FREQUECY, SEVERITY, AD PURE PREMIUM BAD PERSOAL IJURY PROTECTIO PREMIUM & CLAIM DATA BY FREQUECY BAD Frequency by Coverage Personal Frequency Earned Incurred Loss Pure Bodily Property Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Insurance Motorists Comprehensive Collision 1 289,355, ,382, % , ,003, ,969, % , ,167, ,993, % , ,600,404 92,860, % , ,110,618 86,007, % , ,116,901 79,326, % , ,597,122 82,677, % , ,518,808 69,003, % , ,629,044 70,337, % , ,245,861 57,074, % , State 1,981,345, ,633, % , PREMIUM & CLAIM DATA BY SEVERITY BAD Severity by Coverage Personal Severity Earned Incurred Loss Pure Bodily Property Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Insurance Motorists Comprehensive Collision 1 195,774, ,693, % , ,138 1,716 1,439 18, , ,902, ,707, % , ,824 1,346 1,553 16, , ,200, ,073, % , ,712 1,207 1,974 17,449 1,000 2, ,805, ,144, % , ,474 1,552 1,540 17, , ,863,453 88,742, % , ,395 1,329 1,443 17, , ,621,656 94,543, % , ,117 1,351 1,509 18, , ,870,692 87,183, % , ,635 1,266 1,620 15, , ,001,625 90,078, % , ,109 1,256 1,615 15, , ,475,371 72,845, % , ,380 1,249 1,583 18, , ,829,274 57,620, % , ,705 1,502 1,553 18, ,250 State 1,981,345, ,633, % , ,946 1,370 1,581 17, ,326 PREMIUM & CLAIM DATA BY PURE PREMIUM BAD Pure Premium by Coverage Pure Personal Premium Earned Incurred Loss Pure Bodily Property Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Insurance Motorists Comprehensive Collision 1 250,618, ,384, % , ,374, ,698, % , ,696, ,695, % , ,779, ,183, % , ,993,592 92,617, % , ,155,527 90,044, % , ,246,370 81,172, % , ,838,704 74,484, % , ,542,613 62,337, % , ,099,638 47,016, % , State 1,981,345, ,633, % , EPIC Consulting, LLC

39 Exhibit XIII DATA BY FREQUECY, SEVERITY, AD PURE PREMIUM BAD PERSOAL PROPERTY ISURACE PREMIUM & CLAIM DATA BY FREQUECY BAD Frequency by Coverage Personal Frequency Earned Incurred Loss Pure Bodily Property Injury Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Motorists Comprehensive Collision 1 16,818,672 16,850, % , ,810,183 13,206, % , ,032,892 13,426, % , ,519,192 13,509, % , ,463,680 15,138, % , ,404,570 13,175, % , ,609,638 13,335, % , ,896,627 12,052, % , ,287,870 11,946, % , ,167,411 10,227, % , State 184,010, ,869, % , PREMIUM & CLAIM DATA BY SEVERITY BAD Severity by Coverage Personal Severity Earned Incurred Loss Pure Bodily Property Injury Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Motorists Comprehensive Collision 1 24,123,027 20,375, % , ,303 1,144 10,163 15,611 1,365 2, ,950,713 16,040, % , ,995 1,101 9,435 15,111 1,006 2, ,715,577 14,513, % , ,352 1,102 9,104 15, , ,724,422 13,659, % , ,191 1,322 9,150 16, , ,392,372 12,136, % , ,972 1,275 8,310 16, , ,051,285 12,324, % , ,010 1,276 9,195 18, , ,772,134 12,232, % , ,961 1,526 9,485 22, , ,214,333 11,816, % , ,373 1,618 9,064 20, , ,037,088 10,907, % , ,932 1,738 9,485 20, , ,029,785 8,862, % , ,345 1,864 10,059 24, ,254 State 184,010, ,869, % , ,946 1,370 9,373 17, ,326 PREMIUM & CLAIM DATA BY PURE PREMIUM BAD Pure Premium by Coverage Pure Personal Premium Earned Incurred Loss Pure Bodily Property Injury Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Motorists Comprehensive Collision 1 22,103,604 22,281, % , ,668,850 16,301, % , ,445,628 14,752, % , ,474,563 13,894, % , ,854,832 13,202, % , ,406,281 12,243, % , ,179,589 11,580, % , ,790,737 10,763, % , ,662,330 9,846, % , ,424,322 8,003, % , State 184,010, ,869, % , EPIC Consulting, LLC

40 Exhibit XIV DATA BY FREQUECY, SEVERITY, AD PURE PREMIUM BAD UISURED MOTORISTS PREMIUM & CLAIM DATA BY FREQUECY BAD Frequency by Coverage Personal Personal Frequency Earned Incurred Loss Pure Bodily Property Injury Property Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Comprehensive Collision 1 24,189,333 19,347, % , ,437,381 7,212, % , ,952,500 5,452, % , ,936,892 4,681, % , ,434,398 4,038, % , ,809,274 3,391, % , ,960,111 2,290, % , ,432,507 1,502, % , ,545, , % , ,935, % State 168,633,575 48,327, % , PREMIUM & CLAIM DATA BY SEVERITY BAD Severity by Coverage Personal Personal Severity Earned Incurred Loss Pure Bodily Property Injury Property Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Comprehensive Collision 1 15,231,674 7,603, % , ,850 1,563 9,901 1, , ,208,274 7,051, % , ,166 1,411 8,788 1, , ,597,061 6,222, % , ,374 1,170 9,379 1, , ,154,919 7,777, % , ,161 1,321 9,301 1, , ,624,451 8,515, % , ,109 1,203 9,826 1,718 1,087 2, ,120,822 5,174, % , ,939 1,186 9,227 1, , ,301,511 3,871, % , ,691 1,143 9,314 1, , ,595,802 1,822, % , ,147 1,392 8,799 1, , ,529, , % , ,323 1,560 9,269 1, , ,269, % ,651 1,926 9,955 1, ,270 State 168,633,575 48,327, % , ,946 1,370 9,373 1, ,326 PREMIUM & CLAIM DATA BY PURE PREMIUM BAD Pure Premium by Coverage Pure Personal Personal Premium Earned Incurred Loss Pure Bodily Property Injury Property Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Comprehensive Collision 1 22,820,220 20,196, % , ,320,877 7,674, % , ,290,077 6,147, % , ,874,474 4,484, % , ,766,354 3,925, % , ,742,963 2,875, % , ,537,470 1,959, % , ,861, , % , ,846, , % , ,573, % State 168,633,575 48,327, % , EPIC Consulting, LLC

41 Exhibit XV DATA BY FREQUECY, SEVERITY, AD PURE PREMIUM BAD COMPREHESIVE PREMIUM & CLAIM DATA BY FREQUECY BAD Frequency by Coverage Personal Personal Frequency Earned Incurred Loss Pure Bodily Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Motorists Collision 1 164,383, ,209, % ,726, ,421, % ,635, ,904, % ,939, ,198, % ,407,899 91,775, % ,135,377 93,004, % ,552,802 85,588, % ,790,679 81,117, % ,411,882 79,054, % ,667,581 60,156, % State 1,541,652,199 1,000,430, % PREMIUM & CLAIM DATA BY SEVERITY BAD Severity by Coverage Personal Personal Severity Earned Incurred Loss Pure Bodily Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Motorists Collision 1 246,568, ,639, % , ,213 1,134 10,561 2,110 15,581 2, ,566, ,081, % ,871 1,293 10,082 1,834 16,026 2, ,926, ,869, % ,066 1,457 9,666 1,540 19,443 2, ,342, ,009, % ,335 1,815 9,811 1,439 18,800 2, ,853,295 88,440, % ,045 1,503 9,069 1,443 19,044 2, ,475,907 83,456, % ,690 1,302 8,832 1,493 18,652 2, ,019,676 81,807, % ,750 1,311 8,489 1,500 17,959 2, ,079,774 71,617, % ,600 1,322 8,538 1,425 18,896 2, ,933,010 77,833, % ,137 1,255 8,225 1,556 20,662 2, ,886,945 77,675, % ,338 1,283 9,417 1,478 19,790 2,294 State 1,541,652,199 1,000,430, % ,946 1,370 9,373 1,581 17,472 2,326 PREMIUM & CLAIM DATA BY PURE PREMIUM BAD Pure Premium by Coverage Pure Personal Personal Premium Earned Incurred Loss Pure Bodily Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Motorists Collision 1 236,935, ,355, % , ,623, ,903, % ,405, ,153, % ,453,410 99,065, % ,553,843 90,991, % ,865,924 85,456, % ,784,911 77,299, % ,080,962 71,449, % ,804,796 66,595, % ,144,702 55,161, % State 1,541,652,199 1,000,430, % EPIC Consulting, LLC

42 Exhibit XVI DATA BY FREQUECY, SEVERITY, AD PURE PREMIUM BAD COLLISIO PREMIUM & CLAIM DATA BY FREQUECY BAD Frequency by Coverage Personal Personal Frequency Earned Incurred Loss Pure Bodily Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Motorists Comprehensive 1 561,267, ,030, % , ,949, ,809, % , ,490, ,444, % , ,570, ,608, % , ,255, ,830, % , ,528, ,285, % , ,933, ,633, % , ,316, ,170, % , ,782, ,399, % , ,451, ,917, % , State 3,951,544,552 2,696,129, % , PREMIUM & CLAIM DATA BY SEVERITY BAD Severity by Coverage Personal Personal Severity Earned Incurred Loss Pure Bodily Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Motorists Comprehensive 1 496,420, ,115, % , ,804 1,390 10,694 2,000 17,065 1, ,709, ,993, % , ,671 1,385 9,457 1,696 16, ,537, ,089, % , ,758 1,260 9,561 1,793 18, ,800, ,153, % , ,533 1,055 8,778 1,681 16, ,624, ,212, % , ,592 1,328 8,910 1,572 17, ,709, ,815, % , ,306 1,304 9,060 1,620 14, ,030, ,636, % , ,008 1,313 9,516 1,550 18, ,432, ,195, % , ,277 1,592 9,570 1,389 18, ,162, ,006, % , ,380 1,681 8,700 1,323 18, ,116, ,911, % , ,265 1,473 8,851 1,377 20, State 3,951,544,552 2,696,129, % , ,946 1,370 9,373 1,581 17, PREMIUM & CLAIM DATA BY PURE PREMIUM BAD Pure Premium by Coverage Pure Personal Personal Premium Earned Incurred Loss Pure Bodily Property Injury Property Uninsured Band Premium Losses Ratio Frequency Severity Premium Injury Damage Protection Insurance Motorists Comprehensive 1 569,186, ,932, % , ,929, ,396, % , ,987, ,839, % , ,467, ,662, % , ,890, ,872, % , ,219, ,331, % , ,199, ,905, % , ,992, ,361, % , ,080, ,355, % , ,593, ,473, % , State 3,951,544,552 2,696,129, % , EPIC Consulting, LLC

43 Population Density Bands The study s database is summarized in Exhibit XVII for each form of coverage on the basis of each zip code s population density. The population density for each zip code was determined from U.S. Census data. A map of the ten population density bands is presented in Appendix D. Claim frequencies in Michigan for the BI, PD, and PPI coverages are relatively low because of the nature of Michigan s no-fault insurance law. With only three years of claim data for such lowfrequency coverages, it is difficult to draw definitive conclusions when the data is subdivided into ten groups. Three years of data with relatively low claim frequencies, when subdivided into ten groups, are subject to random fluctuations from year-to-year. Despite our concerns about the thin data, the there are clear and discernable patterns in this study s database. We observed: 1) the highest population density band has the highest claim frequency for the BI, PIP, UM and collision; 2) of all the coverages, collision has the most consistent trend of increasing claim frequencies as population density increases; 3) comprehensive claim frequencies are the highest in rural areas and tend to decrease as population density increases, except in the densest Population Band 10; 4) PD and UM claim severities tend to decrease as population density increases; 5) PPI claim severities tend to increase as population density increases; 6) a U-shaped curve for PIP claim severities which were high in both the least populated and most populated areas; 7) we found no strong relationship between population density and claim severities for BI, comprehensive and collision. We recognize that the loss ratios are not precisely identical across the population density bands. Because of the treatment of fixed expenses in the ratemaking formula, identical loss ratios should not be expected. But even more importantly, ratemaking done correctly is based on prospective losses 38 EPIC Consulting, LLC

44 and expenses. The loss ratios in Exhibit XVII are a reflection of actual, historical claims. Even if there were a way to determine perfectly accurate rates on a prospective basis, the actual historical results will naturally vary from the expected results, because of random fluctuations in the claims experience. This is especially true for low-frequency coverages, such as the liability coverages which exist in Michigan. With the exception of the PD and UM coverages, the remaining liability coverages (i.e., BI, PIP and PPI) exhibit a remarkable consistency in loss ratios across the population density bands. The variation in the PD loss ratios tends to be opposite the variation in the UM loss ratios. The physical damage coverages of comprehensive and collision also indicate a great deal of consistency in loss ratios across the population density bands. Viewed from a historical perspective, rather than the prospective perspective necessary for ratemaking, and recognizing that there will always be some variation in actual results from expected results, we find the historical loss ratios across all population density bands to be remarkably consistent. Consistent loss ratios across the population density bands are an indication that the rates have been established in proportion to the claim losses which were incurred in each population density band. 39 EPIC Consulting, LLC

45 Exhibit XVII PREMIUM AD CLAIM DATA BY POPULATIO DESITY BAD ALL COVERAGES COMBIED Capped Loss Ratio by Coverage Population Personal Personal Density Earned Incurred Loss Bodily Property Injury Property Uninsured Band* Premium Losses Ratio Injury Damage Protection Insurance Motorists Comprehensive Collision 1 810,584, ,635, % 33.6% 84.6% 54.1% 69.2% 24.2% 88.9% 69.4% 2 854,529, ,773, % 32.6% 74.6% 49.6% 66.7% 24.4% 74.1% 68.0% 3 862,419, ,546, % 32.7% 86.2% 46.8% 68.7% 20.5% 65.9% 67.1% 4 842,023, ,591, % 33.4% 94.0% 46.8% 72.1% 22.2% 59.3% 67.8% 5 919,668, ,993, % 30.3% 73.2% 46.2% 72.3% 19.3% 59.1% 68.1% 6 939,514, ,526, % 30.1% 74.1% 42.2% 72.4% 20.4% 54.9% 67.5% 7 1,091,300, ,580, % 31.8% 65.2% 44.5% 74.8% 27.0% 54.4% 69.1% 8 980,270, ,482, % 29.3% 60.1% 46.8% 76.1% 34.2% 57.6% 68.9% 9 1,046,759, ,331, % 29.5% 50.9% 45.5% 77.8% 30.0% 56.5% 67.0% ,149, ,468, % 29.5% 37.1% 58.9% 67.6% 71.1% 81.3% 69.0% o Band 58,013,002 37,807, % 30.4% 78.5% 52.5% 89.0% 36.9% 77.1% 77.4% State 9,099,233,170 5,264,738, % 31.3% 70.3% 47.9% 72.2% 28.7% 64.9% 68.2% Frequency by Coverage Population Personal Personal Density Earned Incurred Loss Bodily Property Injury Property Uninsured Band* Premium Losses Ratio Injury Damage Protection Insurance Motorists Comprehensive Collision 1 810,584, ,635, % ,529, ,773, % ,419, ,546, % ,023, ,591, % ,668, ,993, % ,514, ,526, % ,091,300, ,580, % ,270, ,482, % ,046,759, ,331, % ,149, ,468, % o Band 58,013,002 37,807, % State 9,099,233,170 5,264,738, % Severity by Coverage Population Personal Personal Density Earned Incurred Loss Bodily Property Injury Property Uninsured Band* Premium Losses Ratio Injury Damage Protection Insurance Motorists Comprehensive Collision 1 810,584, ,635, % 18,039 1,967 10,608 1,357 23, , ,529, ,773, % 18,390 1,680 10,123 1,299 23, , ,419, ,546, % 17,813 1,688 9,653 1,363 20, , ,023, ,591, % 16,987 1,630 9,051 1,426 19, , ,668, ,993, % 18,092 1,300 9,295 1,467 19, , ,514, ,526, % 17,541 1,299 8,341 1,560 16, , ,091,300, ,580, % 18,908 1,092 8,475 1,821 16, , ,270, ,482, % 18,045 1,176 8,909 1,757 16, , ,046,759, ,331, % 18,280 1,015 9,183 1,813 15, , ,149, ,468, % 17,120 1,010 10,298 2,433 15,541 1,956 2,560 o Band 58,013,002 37,807, % 17,302 1,568 10,729 1, ,329 State 9,099,233,170 5,264,738, % 17,946 1,370 9,373 1,581 17, ,326 Pure Premium by Coverage Population Capped Capped Personal Personal Density Earned Incurred Loss Bodily Property Injury Property Uninsured Band* Premium Losses Ratio Injury Damage Protection Protection Motorists Comprehensive Collision 1 810,584, ,635, % ,529, ,773, % ,419, ,546, % ,023, ,591, % ,668, ,993, % ,514, ,526, % ,091,300, ,580, % ,270, ,482, % ,046,759, ,331, % ,149, ,468, % o Band 58,013,002 37,807, % State 9,099,233,170 5,264,738, % *Population Density Band 1 has the least people per square mile and Band 10 has the most people per square mile. 40 EPIC Consulting, LLC

46 Territories by Coverage The loss data for each of the seven coverages were separately analyzed by zip code so as to determine which areas within Michigan were most similar with respect to the risk of loss. To the extent possible, data were adjusted for catastrophe and jumbo losses which potentially distorted either the claim frequency or the claim severity for any year in the database. After adjustment for catastrophe losses, the pure premiums for each coverage were adjusted for credibility using a commonly accepted actuarial standard for full credibility. The fully-credible pure premiums for each coverage were then grouped so that each group contained zip codes of similar risk. In other words, the zip codes were grouped so that each group contained a similar risk of a BI loss. Then another grouping of the zip codes was done so that each group contained a similar risk of a PD loss, then a grouping by PIP, and etc. The homogeneity of risk within each zip code group was measured by the statistical variance of the pure premiums for each coverage within each group. The goal was to minimize the variance, or increase the homogeneity, of the risk of loss within each group. Because the claim frequencies for Michigan s liability coverages (especially BI, PD, PPI and UM) are so low, and because we had only three years of loss data available for analysis, we have opted not to present the indicated territories in this report for BI, PD, PPI and UM. The results of the analysis for BI, PD, PPI and UM are available upon request. We have presented in Appendices E, F and G the indicated territories for the PIP, comprehensive and collision coverages. Territory 1 represents the territory with the highest pure premium. The pure premiums decrease as the territory number increases. The three maps are significantly different for each coverage. The claim loss exposure varies geographically, and this geographic variation is different for each coverage. The geographic variation in losses arising from injury to persons (as represented by the PIP coverage) is not the same as the geographic variation in losses arising from damage to cars (as represented by the comprehensive and collision coverages). Comprehensive Losses by Peril Table 14 summarizes the claim frequencies, claim severities and pure premiums by cause of loss for the comprehensive coverage. Glass losses and total theft losses, together constitute 46% of the total 41 EPIC Consulting, LLC

47 comprehensive losses. While glass claims have a low average severity, they constitute two-thirds of all comprehensive claims. Total theft claims, on the other hand, are relatively infrequent but they have the highest average claim severity. Table14 Comprehensive by Cause of Loss Peril Frequency % of Total Severity Ratio to Total Pure Premium % of Total Fire % $4, $ % Wind/Hail % 1, % Vandalism % % Total Theft % 5, % Partial Theft % 1, % Glass % % Flood % 3, % Animal Collision % 4, % All Other ,8% 1, % Total % $ $ % Appendices H and I show low, medium and high cost areas for total theft and glass losses. Although not exhibited in this report, we found the following with respect to comprehensive coverage losses. a) Band 10, the most densely populated area, has less than 5% of the earned car years (i.e., exposure counts), yet has more than one-third of Michigan s total theft incurred loss dollars and more than one-third of the partial theft incurred loss dollars. b) Wind and hail losses, and glass losses, appear to be more heavily concentrated in less densely populated areas. Degree of Competition This study was not designed to provide an exhaustive analysis of the degree of competition which exists in the Michigan auto insurance market. However, the data necessary to conduct this study of the claim losses also provide at least a partial picture of the market s competitiveness. In the process of analyzing the geographic variation of claim losses within Michigan, we found a great divergence in the rate territory definitions being used by insurers. Rating territories are the means by 42 EPIC Consulting, LLC

48 which insurers measure and assess geographic risk. Divergence in the assessment of risk is a sign of a competitive market. Divergence in the assessment of risk leads to a divergence of rates available in the insurance market for insurance customers. We found significant differences in the rates being charged by the insurers in the study and we found the divergence in rates to be consistent across all areas within Michigan. We calculated the average premium for each insurer in each of the ten population density bands. The calculations were made for two compulsory coverages (i.e., BI and PIP) and two optional coverages (i.e., comprehensive and collision). The lowest average premium within each band was divided by the overall average premium for that band to determine a ratio of the lowest premium to the average premium. We also calculated a ratio of the highest premium to the average premium for each band and a ratio of the second-highest premium to the average premium for each band. We chose to exhibit the second-highest premium because there is a remarkable difference in this study s database between the highest and second-highest premiums for every coverage, in every population density band. If we had shown only the highest and lowest premiums, some readers may have been misled into believing that the rates for individual insurers in this study were evenly distributed throughout the entire range of rates available in the market. The lowest, highest, and second-highest premium ratios are presented in the following four tables. The difference is the spread of rates from the lowest to the second-highest rate. The complete range of rates within each population density band is represented by the lowest to the highest rate. However, if we had used the highest rate to determine the difference, some readers may have criticized us for using the rates of a single insurer just to exaggerate the rate divergence which exists in all markets throughout Michigan. Table 15 Ratio of Premiums to the Average BI Population Density Band Lowest Premium nd -Highest Premium Highest Premium Difference EPIC Consulting, LLC

49 Table 16 Ratio of Premiums to the Average PIP Population Density Band Lowest Premium nd -Highest Premium Highest Premium Difference Table 17 Ratio of Premiums to the Average Comprehensive Population Density Band Lowest Premium nd -Highest Premium Highest Premium Difference Table 18 Ratio of Premiums to the Average Collision Population Density Band Lowest Premium nd -Highest Premium Highest Premium Difference We found significant rate divergence in every population density band, for every coverage. We interpret the spread of rates available to insurance customers as one indicator of a competitive market throughout Michigan. Conclusions The study s database includes a wealth of information concerning the nature of private passenger auto insurance losses in Michigan. At the risk of oversimplifying, we found that: a) claim frequencies and claim severities are significantly different for each of the coverages, 44 EPIC Consulting, LLC

50 b) the claim losses vary significantly by geographical area and those geographical variations are different for each of the coverages, c) there is a great deal of difference in the rates being charged by insurers in all areas of Michigan, and d) the loss ratios are remarkably consistent across all geographic areas within Michigan and this consistency exists for each coverage. The variation in the nature of losses by coverage and geographic area make it virtually impossible to directly compare private passenger auto losses from one insurer to the next. Each insurer s losses will be dependent upon where its insureds are concentrated geographically and which of the optional coverages its insureds purchase. 45 EPIC Consulting, LLC

51 APPEDICES

52 Bodily Injury Frequency Bands Appendix A Page 1 Band July 2004

53 Bodily Injury Frequency Bands Appendix A Page 2 Band July 2004

54 Property Damage Frequency Bands Appendix A Page 3 Band July 2004

55 Property Damage Frequency Bands Appendix A Page 4 Band July 2004

56 Personal Injury Protection Frequency Bands Appendix A Page 5 Band July 2004

57 Water/Freezing Personal Injury Protection Territories Frequency by Bands Peril Appendix A Page 6 Band July 2004

58 Appendix A Page 7 Personal Property Insurance Frequency Bands Band July 2004

59 Appendix A Page 8 Fire/Lightning Personal Property Insurance Territories Frequency by Bands Peril Band July 2004

60 Uninsured Motorists Frequency Bands Appendix A Page 9 Band July 2004

61 Uninsured Motorists Frequency Bands Appendix A Page 10 Band July 2004

62 Comprehensive Frequency Bands Appendix A Page 11 Band July 2004

63 Comprehensive Territories Frequency by Bands Peril Appendix A Page 12 Band July 2004

64 Collision Frequency Bands Appendix A Page 13 Band July 2004

65 Collision Territories Frequency by Bands Peril Appendix A Page 14 Band July 2004

66 Bodily Injury Severity Bands Appendix B Page 1 Band July 2004

67 Bodily Injury Severity Bands Appendix B Page 2 Band July 2004

68 Property Damage Severity Bands Appendix B Page 3 Band July 2004

69 Property Damage Severity Bands Appendix B Page 4 Band July 2004

70 Personal Injury Protection Severity Bands Appendix B Page 5 Band July 2004

71 Water/Freezing Personal Injury Protection Territories Severity Bands by Peril Appendix B Page 6 Band July 2004

72 Appendix B Page 7 Personal Property Insurance Severity Bands Band July 2004

73 Appendix B Page 8 Fire/Lightning Personal Property Insurance Territories Severity Bands by Peril Band July 2004

74 Uninsured Motorists Severity Bands Appendix B Page 9 Band July 2004

75 Uninsured Motorists Severity Bands Appendix B Page 10 Band July 2004

76 Comprehensive Severity Bands Appendix B Page 11 Band July 2004

77 Comprehensive Territories Severity Bands by Peril Appendix B Page 12 Band July 2004

78 Collision Severity Bands Appendix B Page 13 Band July 2004

79 Collision Territories Severity Bands by Peril Appendix B Page 14 Band July 2004

80 Bodily Injury Pure Premium Bands Appendix C Page 1 Band July 2004

81 Bodily Injury Pure Premium Bands Appendix C Page 2 Band July 2004

82 Property Damage Pure Premium Bands Appendix C Page 3 Band July 2004

83 Property Damage Pure Premium Bands Appendix C Page 4 Band July 2004

84 Personal Injury Protection Pure Premium Bands Appendix C Page 5 Band July 2004

85 Water/Freezing Personal Injury Protection Territories Pure Premium by Bands Peril Appendix C Page 6 Band July 2004

86 Appendix C Page 7 Personal Property Insurance Pure Premium Bands Band July 2004

87 Appendix C Page 8 Fire/Lightning Personal Property Insurance Territories Pure Premium by Bands Peril Band July 2004

88 Uninsured Motorists Pure Premium Bands Appendix C Page 9 Band July 2004

89 Uninsured Motorists Pure Premium Bands Appendix C Page 10 Band July 2004

90 Comprehensive Pure Premium Bands Appendix C Page 11 Band July 2004

91 Comprehensive Territories Pure Premium by Bands Peril Appendix C Page 12 Band July 2004

92 Collision Pure Premium Bands Appendix C Page 13 Band July 2004

93 Collision Territories Pure Premium by Bands Peril Appendix C Page 14 Band July 2004

94 Appendix D Page 1 Population Density Bands Band /A 30 July 2004

95 Appendix D Page 2 Population Density Bands Territories Band /A 30 July 2004

96 Personal Injury Protection Territories Appendix E Page 1 Territory July 2004

97 Personal Injury Protection Territories Appendix E Page 2 Territory July 2004

98 Comprehensive Territories Appendix F Page 1 Territory July 2004

99 Comprehensive Territories Appendix F Page 2 Territory July 2004

100 Collision Territories Appendix G Page 1 Territory July 2004

101 Collision Territories Territories by Peril Appendix G Page 2 Territory July 2004

102 Cause of Loss Theft Appendix H Page 1 High Medium Low 14 July 2004

103 Fire/Lightning Cause of Loss Territories Theft by Peril Appendix H Page 2 High Medium Low 14 July 2004

104 Cause of Loss Glass Appendix I Page 1 High Medium Low 14 July 2004

105 Cause of Loss Glass Appendix I Page 2 High Medium Low 14 July 2004