BULLETIN NO. 587April 21, 1997
RECALCULATION OF CEDING EXPENSE ALLOWANCES
PRIVATE PASSENGER 1990 - 1995, COMMERCIAL 1994 - 1995
On April 16, 1997, C.A.R.’s Governing Committee approved the Operations Committee’s recommendation to recalculate private passenger ceding expense allowances for calendar years 1990 through 1995, and commercial ceding expense allowances for calendar years 1994 through 1995, using ceded claim frequency data reported through the December 1997 accounting/statistical submission. This recommendation was based on two appeals recently approved by the Operations Committee, where the companies’ incorrect reporting of subrogation recoveries negatively impacted their ceding expense allowances.
Note that, beginning in 1990, the private passenger ceding expense formula outlined in Rule 17 of C.A.R.’s Rules of Operations provides that a portion of ceding expenses allowed will be based on a Servicing Carrier’s ceded claim frequency relative to that of the industry. That is, C.A.R. reimburses Servicing Carriers for their unallocated loss adjustment expenses and one half of their general company expenses at a rate equal to the expense components included in the approved rates times the company’s ceded claim frequency relative to that of the industry. Final ceding expenses are calculated using derived claim counts through 27 months. The commercial ceding expense formula was similarly modified for calendar year 1994 and later.
C.A.R. calculates ceded claim frequency based on claim count data derived by the A.I.B. Specifically, C.A.R. uses property damage liability and no-fault claim counts in the liability calculations, and collision and comprehensive claim counts in the physical damage calculations. The A.I.B. claim count derivation process summarizes loss dollars for all loss transactions relating to a particular claim, including subrogation recoveries and excluding allocated loss adjustment expense transactions. Accordingly, incorrect reporting of subrogation transactions in many cases will cause the total loss dollars for a particular claim to be negative, resulting in a -1 derived claim count. This reduces the company’s total claim frequency relativity, and therefore reduces the company’s ceding expense allowance.
In order to provide all Servicing Carriers with an equal opportunity to correct similar loss reporting problems and to ensure a timely and accurate ceding expense true-up, the Operations Committee recommended that companies be allowed to review and correct their loss reporting through the December 1997 accounting/statistical submission (due at C.A.R. on February 15, 1998). C.A.R. Staff will then recalculate ceding expenses based on derived ceded claim counts using data reported from inception through December 1997.
Reports have been mailed to Servicing Carriers to assist them in identifying similar loss reporting problems that impact ceding expense allowances. Corrections should be submitted no later than the December 1997 accounting/statistical submission. Due to the impact to other member companies of these ceding expense adjustments, and to the cumbersome effort required for manual claim count derivation, the Operations Committee has advised that this reporting extension should be ample time to adjust loss reporting, such that similar appeals in the future would be approved only under extraordinary circumstances.
Note that the Reinsurance Operations Subcommittee is in the process of considering a modification to C.A.R. Staff’s procedures to use derived claim count excluding the impact of subrogation recoveries for 1996 and later ceding expense calculations.
Attached is a document which was put together by C.A.R.’s Audit Department to illustrate proper loss reporting. It describes a sample loss scenario and provides detailed statistical data that should be reported including transaction type, claim numbering, loss type, claim count, and loss amount. This example should be used not only by Servicing Carriers for their ceded loss correction efforts, but by all member companies to take efforts to ensure correct loss reporting.
Questions relative to the information enclosed may be directed to C.A.R.’s Statistical Department. Further information relative to your company’s loss reporting issues is also available from C.A.R.’s Audit Department.
Attachments
Natalie Hubley
Statistical Manager