Allstate 2015 Annual Report Download - page 178

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and the Parts and Equipment price index and other external indices. We believe our claim settlement initiatives, such
as improvements to the claim review and settlement process, the use of special investigative units to detect fraud
and handle suspect claims, litigation management and defense strategies, as well as various other loss management
initiatives underway, contribute to the mitigation of injury and physical damage severity trends.
Changes in homeowners current year claim severity are generally influenced by inflation in the cost of building
materials, the cost of construction and property repair services, the cost of replacing home furnishings and other
contents, the types of claims that qualify for coverage, deductibles, other economic and environmental factors and the
effectiveness and efficiency of our claim practices. We employ various loss management programs to mitigate the effect
of these factors.
As loss experience for the current year develops for each type of loss, it is monitored relative to initial assumptions
until it is judged to have sufficient statistical credibility. From that point in time and forward, reserves are reestimated
using statistical actuarial processes to reflect the impact actual loss trends have on development factors incorporated
into the actuarial estimation processes. Statistical credibility is usually achieved by the end of the first calendar year;
however, when trends for the current accident year exceed initial assumptions sooner, they are usually determined to be
credible, and reserves are increased accordingly.
The very detailed processes for developing reserve estimates, and the lack of a need and existence of a common set
of assumptions or development factors, limits aggregate reserve level testing for variability of data elements. However,
by applying standard actuarial methods to consolidated historic accident year loss data for major loss types, comprising
auto injury losses, auto physical damage losses and homeowner losses, we develop variability analyses consistent with
the way we develop reserves by measuring the potential variability of development factors, as described in the section
titled “Potential Reserve Estimate Variability” below.
Causes of reserve estimate uncertainty Since reserves are estimates of unpaid portions of claims and claims expenses
that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophe
losses, requires regular reevaluation and refinement of estimates to determine our ultimate loss estimate.
At each reporting date, the highest degree of uncertainty in estimates for most of our losses arise from claims
remaining to be settled for the current accident year and the most recent preceding accident year. The greatest degree
of uncertainty exists in the current accident year because the current accident year contains the greatest proportion of
losses that have not been reported or settled but must be estimated as of the current reporting date. Most of these losses
relate to damaged property such as automobiles and homes, and medical care for injuries from accidents. During the first
year after the end of an accident year, a large portion of the total losses for that accident year are settled. When accident
year losses paid through the end of the first year following the initial accident year are incorporated into updated actuarial
estimates, the trends inherent in the settlement of claims emerge more clearly. Consequently, this is the point in time at
which we tend to make our largest reestimates of losses for an accident year. After the second year, the losses that we
pay for an accident year typically relate to claims that are more difficult to settle, such as those involving serious injuries
or litigation. Private passenger auto insurance provides a good illustration of the uncertainty of future loss estimates: our
typical annual percentage payout of reserves remaining at December 31 for an accident year is approximately 45% in the
first year after the end of the accident year, 20% in the second year, 15% in the third year, 10% in the fourth year, and the
remaining 10% thereafter.
Reserves for catastrophe losses Property-Liability claims and claims expense reserves also include reserves for
catastrophe losses. Catastrophe losses are an inherent risk of the property-liability insurance industry that have
contributed, and will continue to contribute, to potentially material year-to-year fluctuations in our results of operations
and financial position. We define a “catastrophe” as an event that produces pre-tax losses before reinsurance in excess
of $1 million and involves multiple first party policyholders, or a winter weather event that produces a number of claims
in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time
following the event. Catastrophes are caused by various natural events including high winds, winter storms and freezes,
tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes. We are also exposed to man-
made catastrophic events, such as certain types of terrorism or industrial accidents. The nature and level of catastrophes
in any period cannot be reliably predicted.
The estimation of claims and claims expense reserves for catastrophe losses also comprises estimates of losses
from reported claims and IBNR, primarily for damage to property. In general, our estimates for catastrophe reserves
are based on claim adjuster inspections and the application of historical loss development factors as described above.
However, depending on the nature of the catastrophe, the estimation process can be further complicated. For example,
for hurricanes, complications could include the inability of insureds to promptly report losses, limitations placed on claims
adjusting staff affecting their ability to inspect losses, determining whether losses are covered by our homeowners policy
(generally for damage caused by wind or wind driven rain) or specifically excluded coverage caused by flood, estimating
additional living expenses, and assessing the impact of demand surge, exposure to mold damage, and the effects of
numerous other considerations, including the timing of a catastrophe in relation to other events, such as at or near the
end of a financial reporting period, which can affect the availability of information needed to estimate reserves for that