How large can a motor loss be?

Swiss Re’s Casualty underwriting team presents a 3-step approach for estimating possible maximum motor losses.

From time to time, we hear about large-scale motor accidents over the news, both local and international: more than 30 people injured or killed when a tractor exploded after colliding with a minibus and a car in China; at least 20 people killed and 45 injured after two buses collided head-on in Bangladesh, and so on.

Should insurers classify these accidents as large motor losses? And what do they tell us about the main contributors to losses in Asian motor portfolios?

Elsewhere in the world, property damage and business interruption generally make a larger contribution to motor losses. But in most Asian countries, property damage is usually capped, therefore third-party bodily injury claims become the main contributor to driving up motor losses.

Know your exposure, know your need

The next question for insurers is: How large a potential loss is your motor portfolio exposed to? Do you have enough cover? Or are you covered beyond your needs? In this article, we would like to share with you a general framework for estimating a possible maximum loss (PML) focusing on bodily injuries, which may occur in exceptional circumstances when the most unfavourable circumstances are more or less combined.

In this illustration, we estimate the PML using only a given scenario and certain simplified assumptions. Real-life cases may deviate from this benchmark to a greater or lesser extent, depending on the market, its local regulations, the actual circumstances of a specific case, etc. We also assume that the claim is settled by the court and paid out in the year of the accident.

To calculate the PML, we first need to estimate the size of an individual claim against different degrees of injury, such as tetraplegia, paraplegia and death. We then combine this with the estimated number of injuries under a selected large loss scenario as explained below.

Step 1: Estimate an individual bodily injury claim

In general, a bodily injury claim is a combination of four components:

1. Loss of earnings
2. Assistance (e.g. long-term care costs)
3. Pain and suffering (e.g. physical and emotional stress caused by an injury)
4. Remainder (e.g. costs of adapting accommodation)

Here, we assume the injured is a 30-year-old man whose wife has no income, and they have two young kids. He works with a large company, with an above average income and bright career prospects.

In charts 1a, 1b and 1c, we summarise our estimated bodily injury claim sizes in six Asian markets under each selected degree of injury scenario:

Step 2: Develop large loss scenarios

Next, we estimate the potential number of injuries and amount of property damage for each of the three large loss scenarios we have selected just for this discussion.  These scenarios, which as the table shows, are derived from a combination of historic and hypothetical events. 

As the severity of large claim experience in Asia is fairly low as compared with Europe and US, our large loss scenarios are developed based on European large loss experience.

How relevant are these European loss experience for Asia? They are relevant because similar accidents also occurred in Asia, although the loss amounts involved were lower and the actual circumstances might vary.  Examples include: 

• For scenario 1, an express train collided with a dump truck at a railway crossing in Hokkaido Japan in January 2010.
• For scenario 2, one people killed and 14 injured when a LPG tanker caught fire after hitting a car in Kollam in 2009.  A number of shops nearby were also gutted in the fire.
• For scenario 3, two people killed and 38 injured after a long-distance bus overturned and was hit by a truck inside Muchong tunnel on the highway between Hezhou and Zhongshan in southern China.

These European cases thus serve as useful reference for developing more extreme scenarios of its kind.

Step 3: Estimate PML amounts

With the above information, an estimated PML amount can be easily calculated.

For example, if large loss scenario 1 happens in your market, assuming all injuries suffer from tetraplegia, the estimated PML amount would be:

Amount of claim per tetraplegic injury x Number of injuries under large loss scenario 1 + Property damage amount under large loss scenario 1

The above are just three examples of large motor losses which are highly driven by bodily injuries. The property damage amount would be subject to local regulations and policy limits. For those markets where third-party property damages are not capped, it is possible that other scenarios may cause even larger losses.

If you are interested to know more about this subject, or if you have other methodologies to share with us, please feel free to contact Reto Brosi, Udo Alfare or Adeline Chua (details, top right). We are more than happy to discuss this with you.

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