Excess Baggage

As the bar moves higher for personal injury damage awards in Ontario and across the country, primary insurers are not the only ones paying close attention. Excess of loss reinsurers are seeing greater frequency and severity as auto claims regularly enter layers that were once thought strictly “catastrophic.”

The most recent large personal injury award, involving a Beeton, Ontario woman who was severely injured in an Aug. 2, 2002 car accident, is only the latest in a cluster of settlements involving insurance companies. On Sept. 2, Ontario Superior Court Justice Peter Howden awarded Katherine-Paige MacNeil a record-setting Cdn$18.4 million after the car in which she was a back-seat passenger ran a stop sign, crossed a highway and landed in a ditch.

In April, the Ontario Court of Appeal upheld a Cdn$17-million personal injury award — at the time, the largest in Canadian history — to Rob Marcoccia. In June 2000, Marcoccia suffered massive brain damage when he collided with a furniture truck at an intersection.

“The cluster of awards is getting larger and the amounts are getting higher,” says Vincent Chaignet, assistant vice president of claims for Munich Reinsurance Company of Canada. “These clearly show that future care cost awards are increasing, with no real ceiling in sight. This should have already raised the flag for insurance companies.”

Chaignet notes that excess of loss reinsurers such as Munich Re are involved in virtually all of these types of large awards — particularly in Ontario, where it is not uncommon to see both tort and accident benefits (AB) on the same file. But he also sees this trend moving to other parts of the country.

“We provide reinsurance for Insurance Corporation of British Columbia (ICBC), which has traditionally not seen the same types of awards as Ontario,” Chaignet says. “Recently, however, there was a case in which an auto accident victim suffered serious injuries, including loss of arm and partially amputated leg. The plaintiff brought in a future care specialist from outside of the province and came up with a proposed settlement of Cdn$9.1 million. I think that caught ICBC’s claims department and legal counsel, who are very experienced, off guard. The claim was settled for less than this amount, but you are seeing this shift across the country.”

INCREASED FREQUENCY AND SEVERITY

For Francis Blumberg, chief agent in Canada for PartnerRe, the auto excess of loss situation has been simmering on the back burner for several years. “PartnerRe’s position on auto excess of loss is markedly different from the majority of reinsurers and the rest of the marketplace,” he says. “We have felt for several years that auto excess is underpriced, particularly in the lower layers where there is higher claims frequency.”

The reinsurer conducted a study of Ontario auto insurance claims trends last summer. It showed that severity and frequency for claims greater than Cdn$2.5 million had increased. For single injury accidents, an insurer’s liability used to be contained mostly within the Cdn$2.5-million range. PartnerRe’s study shows that in recent years, this has moved into the range of between Cdn$3 million and Cdn$4 million. In fact, the report noted, it is not necessary to have multiple claimants for a substantial loss. The report cites a case in which a 36-year-old man was directing his wife into the garage when she accidentally pinned him against the wall, resulting in a Cdn$3.1-million settlement.

The study pinpointed another issue, which is the increasing length of time it is taking to settle serious and permanent injury cases in Ontario. “In past years, six years would have been a maximum duration,” notes Blumberg. “Nowadays, a claim can still be open and active after 10 or even 12 years.

Andr Fredette, senior vice president and general manager of CCR Canada, agrees the duration of long-tail claims has become a challenge for reinsurers.

“The problem is these claims can sneak up on you from behind,” he says. “You think you have something properly reserved for Cdn$1-2 million, and then you get an award at $18-million plus — and that is from seven years ago. The length of some of these long-tail auto claims has changed. It used to be four to six years, but it can drag on, and then you face the amount many years later.”

PRICING

In terms of excess of loss pricing, reinsurers seem to fall into two classes, according to Caroline Kane, senior vice president and chief agent in Canada for Toa Reinsurance Company of America.

“You are really seeing two camps — those who are taking an aggressive approach to low-level auto and those who are charging higher prices,” she says. “In some cases, a primary company may get generous pricing for low layers and not be able to get pricing on higher layers from the rest of the reinsurance market. We have had situations like this happen.”

Chronic underpricing in auto excess can have a negative impact on the marketplace, according to sources. “In terms of primary companies, I would say there is a healthy mix of companies who have higher retentions, such as $5 million,” says Blumberg. “But there are also many companies who are at much lower retentions and who are buying reinsurance at what we consider to be inadequate prices. This isn’t a healthy situation. It reduces the incentive for insurers to address the issues of claims, benefit levels, proper reserving and adequate rates.”

It is now common to see $5 million in excess of $5 million, “and we used to say that would pick up the big hits,” says Chaignet. “But now that is more a medium-sized claim, particularly in Ontario when there is a tort and AB claim on the same file. That means for primary companies any adverse development is hitting them on their bottom line, and that is where a lot of difficulties in underwriting, claims and pricing happen.”

HIGHER RETENTIONS

Reinsurers say that higher retention levels show a commitment from primary carriers that they are taking rising claims costs seriously.

“What we want to see is skin in the game from primary insurers,” observes Kane. “That means their retentions should be sufficient based on their capital and surplus. We are seeing that happen with larger insurers, who are moving into limits of $5 million in excess of $5 million. For the smaller insurers, with lower layers, it is important for us to pay attention to 10-year loss development.”

Reinsurers have focused more tightly on adverse loss development and reserving practices at the primary insurer level in recent years. Some are better at reserving than others, according to Fredette.

“Some [primary companies] we deal with are very professional and clear about reserves,” he notes. “Others are less clear, and sometimes either do step reserving or draw on their bulk reserves to fund specific cases. The problem with that from a reinsurer standpoint is that we cannot price the exposure accurately, and we end up with unprofitable business.”

Reinsurers can do audits of reserving practices, but “it is difficult for us to do that with every company,” Kane says. “As excess of loss reinsurers, it is important for us to underwrite the claims departments of primary insurers. With two companies writing a similar book of Ontario auto business, one may be very proactive, hiring AB specialists and people with medical backgrounds, ensuring reasonable case workloads and using solid reserving practices. The other may be inundated with claims and backlogged.”

Fredette notes that another challenge of auto excess is the sheer number of claims. “Over 90% of the files we see in terms of numbers come from auto excess,” he says. “Some of the files we get from insurance companies are, quite literally, two feet thick.”

POTENTIAL AVAILABILITY ISSUES

Some reinsurers have turned away from writing a high proportion of auto excess business. For example, auto excess accounts for less than 10% of Partner Re’s overall premiums in Canada — far less than the industry average of 30-40% of reinsurance premiums, according to some estimates. Other reinsurers are willing to take auto excess of loss business, but only when it is blended in with other programs to offset potentially unprofitable business.

Given the importance of Ontario auto in terms of overall industry premiums and the “take all comers” rule, it is not as easy for primary insurance companies to walk away from unprofitable business. However, Fredette says he has seen more insurers trying to “rebalance their portfolios” to include less auto as a proportion of other business. “Of course, if too many insurers do that, we could get an availability problem,” he says.

In a highly regulated system such as Ontario auto, the two main options for insurers are to lobby for product reform or raise rates. If the former does not happen quickly, the latter will have to follow soon enough. Ontario’s insurance regulator recently approved an average 6.2% rate increase in 2009 Q3 for insurers that represent 34% of the market. But for many, the issue is whether the increases are enough to offset the generous benefits and costs built into the product. Another question is whether or not they might halt the trend of increasing personal injury awards.

“For primary companies, the only way to get money back is rate increases, and that becomes a huge issue for regulators and the public,” Chaignet says. “The biggest problem will come if insurers cannot price the product properly, and are willing to walk away from it. That becomes the political crisis. The question is: how far are we away from that right now?”

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What we want to see is some skin in the game from primary insurers. That means their retentions should be sufficient based on their capital and surplus.