Mercury Insurance 2010 Annual Report Download - page 51

California Bodily Injury Inflation Reserve Sensitivity Analysis
Accident
Year
Number of
Claims
Expected(a)
Actual
Recorded
Severity at
12/31/10
Implied
Inflation Rate
Recorded(b)
(A) Pro-forma
severity if actual
severity is lower by
10% for 2010,
5% for 2009, and
3% for 2008
(B) Pro-forma
severity if actual
severity is higher by
10% for 2010,
5% for 2009, and
3% for 2008
Favorable loss
development if
actual severity is
less than recorded
(Column A)
Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
2010 .... 28,877 $8,249 -5.3% $7,424 $9,074 $23,824,000 $(23,824,000)
2009 .... 26,592 $8,708 10.1% $8,273 $9,143 $11,568,000 $(11,568,000)
2008 .... 30,337 $7,909 3.1% $7,672 $8,146 $ 7,190,000 $ (7,190,000)
2007 .... N/A $7,674
Total Loss Development—Favorable (Unfavorable) $42,582,000 $(42,582,000)
(a) The increase and decrease in the total number of claims expected in 2010 and 2009, respectively, is
reflective of the change in claims handling process noted above. It may also be impacted by declining
numbers of insured exposures, partially offset by catastrophe losses from heavy rainstorms in California in
December 2010. The number of claims expected excludes those claims that were closed without any
payment.
(b) The change in the implied inflation rate in 2010 and 2009 is skewed by the change in claims handling
process noted above. The Company believes the comparison between 2010 and 2008 is more indicative of
the actual severity trend. This results in an annualized implied inflation rate of 2.1%.
(2) Claim Count Development
The Company generally estimates ultimate claim counts for an accident period based on development of
claim counts in prior accident periods. For California automobile BI claims, the Company has experienced that
approximately 2% to 7% additional claims will be reported in the year subsequent to an accident year. However,
such late reported claims could be more or less than the Company’s expectations. Typically, almost every claim
is reported within one year following the end of an accident year and at that point the Company has a high degree
of certainty as to what the ultimate claim count will be. The following table presents the number of BI claims
reported at the end of the accident period and one year later:
California Bodily Injury Claim Count Development Table
Accident year
Number of claims
reported at December 31 of
each accident year
Number of claims
reported at December 31
one year later
Percentage increase in
number of claims
reported
2007 ........... 33,378 35,638 6.8%
2008 ........... 29,647 30,229 2.0%
2009 ........... 25,684 26,555 3.4%
The low percentage increases in the more recent periods is likely indicative of the Company’s efforts to
route the majority of first notice of loss calls through the 24/7 call center, thereby speeding up the reporting
process for our customers. There are many other potential factors that can affect the number of claims reported
after a period end. These factors include changes in weather patterns, a change in the number of litigated files,
and whether the last day of the year falls on a weekday or a weekend. However, the Company is unable to
determine which, if any, of the factors actually impact the number of claims reported and, if so, by what
magnitude.
At December 31, 2010, there were 28,182 BI claims reported for the 2010 accident year and the Company
estimates that these are expected to ultimately grow by 2.5%. The Company believes that while actual
development in recent years has ranged between approximately 2% and 7%, it is reasonable to expect that the
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