Mercury Insurance 2015 Annual Report Download - page 47

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The following table presents the effects of the California automobile BI loss reserves on the 2015, 2014, and 2013 accident
years based on possible variations in the severity recorded; however, the variation could be more or less than these amounts.
California Automobile Bodily Injury Inflation Reserve Sensitivity Analysis
Accident
Year
Number of
Claims
Expected
Actual
Recorded
Severity at
12/31/15
Implied
Inflation Rate
Recorded (1)
(A) Pro-forma
severity if actual
severity is lower by
10% for 2015,
5% for 2014, and
3% for 2013
(B) Pro-forma
severity if actual
severity is higher
by
10% for 2015,
5% for 2014, and
3% for 2013
Favorable loss
development if
actual severity is
less than recorded
(Column A)
Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
2015 29,529 $ 10,691 5.1% $ 9,622 $ 11,760 $ 31,567,000 $ (31,567,000)
2014 30,264 $ 10,172 -0.8% $ 9,663 $ 10,681 $ 15,404,000 $ (15,404,000)
2013 29,474 $ 10,259 5.0% $ 9,951 $ 10,567 $ 9,078,000 $ (9,078,000)
2012 28,018 $ 9,772 — — — — —
Total Loss Development— Favorable (Unfavorable) $ 56,049,000 $ (56,049,000)
(1) Implied inflation rate is calculated by dividing the difference between current and prior year actual recorded severity by
the prior year actual recorded severity.
(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 3% to 5% 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.
There are many other potential factors that can affect the number of claims reported after an accident period ends. These
factors include changes in weather patterns, a change in the number of litigated files, the number of automobiles insured, and
whether the last day of the accident period 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, 2015, there were 28,255 BI claims reported for the 2015 accident year and the Company estimates that
these are expected to ultimately grow by approximately 4.5%. The Company believes that while actual development in recent
years has ranged between approximately 3% to 5%, it is reasonable to expect that the range could be as great as between 0% and
10%. Actual development may be more or less than the expected range.
The following table presents the effects on loss development of different claim count within the broader possible range at
December 31, 2015:
California Automobile Bodily Injury Claim Count Reserve Sensitivity Analysis
2015 Accident Year Claims Reported
Amount Recorded
at 12/31/15 at 4.5%
Claim Count
Development
Total Expected
Amount If Claim
Count Development is
0%
Total Expected
Amount If Claim
Count Development is
10%
Claim count 28,255 29,529 28,255 31,081
Approximate average cost per claim Not meaningful $ 10,691 $ 10,691 $ 10,691
Total dollars Not meaningful $ 315,695,000 $ 302,074,000 $ 332,287,000
Total Loss Development—Favorable (Unfavorable) $ 13,621,000 $ (16,592,000)
(3) Unexpected Losses From Older Accident Periods
Unexpected losses are generally not provided for in the current loss reserve because they are not known or expected and
tend to be unquantifiable. Once known, the Company establishes a provision for the losses, but it is not possible to provide any
meaningful sensitivity analysis as to the potential size of any unexpected losses. These losses can be caused by many factors,
including unexpected legal interpretations of coverage, ineffective claims handling, regulations extending claims reporting periods,
assumption of unexpected or unknown risks, adverse court decisions as well as many unknown factors.