Auto Injury Claims The What, Why and How of it All Richard A. Derrig OPAL Consulting LLC Adam Carmichael Insurance Research Council CAS Annual Meeting Phoenix, AZ May 15-18, 2005

AGENDA WHAT: The characteristics of current day Auto Injury Coverges,1 st and 3 rd Party Why: The Determinants of a Total Compensation Settlement How: The Negotiation System to Settle 3 rd Party Injury Claims

Auto Injury Issues IRC Studies (1977+, latest 2002 CY) AIB Studies (1986+, latest 1996 AY) Medicals Dominate Injury & Treatment Types General Damages (Pain & Suffering) Claim Investigation Suspicion of Fraud and Build-Up

WHY Special (Claimed) and General Damages Economic and Non-Economic Damages Circumstances of The Claim Attorneys Fraud and Build-Up

BI Settlement Issues Investigation Suspicion of Fraud and Build-up Settlement Negotiation Low Impact Collision Passengers Bad Faith Evolution Over Time

Injury Type Changes Inj8996 Fracture14%5% Inpatient7%4% Serious Visible14%2% Prior Inj.6%27% Source: AIB Final Report (2003)

Total Claimed Medical Charges by Type of Service

General Damages Special Damages are Claimant Economic Losses –Medical Bills –Wage Loss –Other Economic General Damages are Residual of Negotiated Settlement Less Specials –“Three Times Specials” is a Myth

Settlement Modeling Major Claim Characteristics Tobit Regression for Censored Data (right censored for policy limits) Evaluation Model for Objective “Facts” Negotiation Model for all Other “Facts”, including suspicion of fraud or build-up

Evaluation Variables Prior Tobit Model (1993AY) Claimed Medicals (+) Claimed Wages (+) Fault (+) Attorney (+18%) Fracture (+82%) Serious Visible Injury at Scene (+36%) Disability Weeks 3 weeks) New Model Additions (1996AY) Non-Emergency CT/MRI (+31%) Low Impact Collision (-14%) Three Claimants in Vehicle (-12%) Same BI + PIP Co. (-10%) [Passengers -22%]

Negotiation Variables New Model Additions (1996AY) Atty (1st) Demand Ratio to Specials 6 X Specials) BI IME No Show (-30%) BI IME Positive Outcome (-15%) BI IME Not Requested (-14%) BI Ten Point Suspicion Score 5.0 Average) [1993 Build-up Variable (-10%)] Unknown Disability (+53%) [93A (Bad Faith) Letter Not Significant] [In Suit Not Significant] [SIU Referral (-6%) but Not Significant] [EUO Not Significant] Note: PIP IME No Show also significantly reduces BI + PIP by discouraging BI claim altogether (-3%).

Total Value of Negotiation Variables Total Compensation VariablesAvg. Claim/Factor Evaluation Variables$13,948 Disability Unknown st Demand Ratio1.09 BI IME No Show0.99 BI IME Not Requested0.90 BI IME Performed with Positive Outcome0.97 Suspicion0.87 Negotiation Variables0.87 Total Compensation Model Payment$12,058 Actual Total Compensation$11,863 Actual BI Payment$8,551

HOW Negotiation is the Principal Method of Settling Liability Claims No Real Studies of How the Process Works Bargaining Models (Nash) may be too Complex for Simple Case – One issue $$.

BI Negotiation Leverage Points Adjuster Advantages Adjuster has ability to go to trial Company has the settlement funds Attorney, provider, or claimant needs money Adjuster knows history of prior settlements Adjuster can delay settlement by investigation Settlement authorization process in company Initial Determination of Liability Table 1

BI Negotiation Leverage Points Attorney/Claimant Advantages Attorney/Claimant can build-up specials Asymmetric information (Accident, Injury, Treatment) Attorney/Claimant can fail to cooperate Attorney has experience with company Investigation costs the company money Attorney can allege unfair claim practices (93A) Adjuster under pressure to close files Table 2

Negotiated Settlements Specials may be Discounted or Ignored Medicals: Real or Built-up? Information from Investigation Independent Medical Exams (IMEs) Special Investigation (SIU) Suspicion of Fraud or Build-up

Independent Medical Exams Policy Requirement (Mass) General Claim Information plus Medical Examination Outcomes –No change recommended –Refused or no show –Damages mitigated or –Treatment curtailed Cost ($350, $75 no show)

IME Savings PIP & BI PIP Sample:1996 CSE Net Savings (PIP)-0.8% Savings from IME Requ but not Comp0.7% Savings from Positive IMEs-0.4% Cost of Negative IMEs-1.1% PIP+BI Sample:1996 CSE Net Savings (PIP+BI)8.7% Savings from IME Requ but not Comp*4.3% Savings from Positive IMEs4.9% Cost of Negative IMEs-0.5% *Inclusion of All PIP claims with IME requested but not completed. 4.2% of savings for 1993 AIB comes from PIPs with no matching BIs where IME requested but not completed. 2.1% savings for 1996 DCD. 2.7% savings for 1996 CSE.

Net IME Savings By Suspicion Level ClaimIMESuspicion Level PaymentTypeClaimsNone (0) Low (1-3) Mod (4-6) High (7-10) ALL PIP Suspicion Score (CSE Model) PIP PIP & BI matching -8.1%-2.9%3.4%-1.6%-0.8% BI Suspicion Score (NHR Model) PIP+BIBestPIP & BI matching -8.0%0.5%14.4%-4.5%6.2%

Breakdown of Same/Different Company Claims CountTotal Pay Total Med % Injuries Serious Frac All Claims429$13,346$4,7705.8% Same Company Claims118$13,246$4,9699.3% Same Co./Same Policy-Clmt is Pass 41$11,029$5, % Same Co./Same Policy-Clmt is Pedestr 22$17,862$5, % Same Co./Same Policy- Uninsured Clm 16$ 9,416$3,9310.0% Same Co./Different Policy39$14,542$4,9365.1% Different Company Claims311$13,383$4,6954.5%

Comparison of Known Disability Claims vs. Unknown Disability Claims No. / Percent of ClaimsMean* UnknownKnownUnknownKnown Total Paid63429$16,765$13,346 Medical Settlement64429$6,387$4,546 Wage Settlement0102$0$3,578 First Demand46376$26,298$23,924 Second Demand19240$22,342$12,745 Average Weekly Wage11116$455$569 Sprain/Strain Only58%61% Primary Provider CH PT MD 14% 31% 53% 46% 22% 31% BI Suspicion Score PIP Suspicion Score * mean calculation of non-zero entries

Settlement Ratios by Injury and Suspicion VariablePIP Suspicion Score = Low (0-3) PIP Suspicion Score = Mod to High (4-10) PIP Suspicion Score = All 1996 (N-336)1996 (N-216)1996 (N-552) Str/SPAll OtherStr/SPAll OtherStr/SPAll Other Settlement 81%19%94%6%86%14% Avg. Settlement/Specials Ratio Median Settlement/Specials Ratio

HELP Anyone willing to study negotiation cooperatively can contribute confidential access to BI claim files. Text miners are standing by willing to extract non-identified data relevant to negotiations Experts are standing by to analyze the patterns in the data.

References Derrig, R.A. [2004],The Settlement Negotiation Process for Automobile Bodily Injury Liability Claims in the Presence of Suspicion of Fraud and Build-Up, Risk Theory Society, NY. Derrig, R.A. and H.I. Weisberg, [2004], Determinants of Total Compensation for Auto Bodily Injury Liability Under No-Fault: Investigation, Negotiation and the Suspicion of Fraud, Insurance and Risk Management, v 71 (4), pp Derrig, R.A., H.I. Weisberg and Xiu Chen, [1994], Behavioral Factors and Lotteries Under No-Fault with a Monetary Threshold: A Study of Massachusetts Automobile Claims, Journal of Risk and Insurance, 61:2, Ross, Lawrence H. [1980], Settled out of Court, (Chicago, III: Aldine). Insurance Research Council [2004], Fraud and Build-Up in Auto Injury Claims. Malvern, PA Insurance Research Council [ 2003], Auto Injury Insurance Claims. Countrywide Patterns in Treatment, Cost, and Compensation, Malvern PA Abrahamse, A. and Stephen J. Carroll [1999], The Frequency of Excess Claims for Automobile Personal Injuries, Automobile Insurance: Road Safety, New Drivers, Risks, Insurance Fraud and Regulation, Claire Laberge-Nadeau, and Georges Dionne, Eds., Kluwer Academic Publishers,