Mercury Insurance 2007 Annual Report Download - page 50

48 MERCURYNOW 2007
MANAGEMENT’S DISCUSSION & ANALYSIS
2. CLAIMS REPORTED VARIABILITY (CLAIM COUNT DEVELOPMENT)
The Company generally estimates ultimate claim counts for an accident period based on how claim counts have developed in prior accident periods.
Typically, for California automobile BI claims, the Company has experienced that approximately 5% to 10% additional claims will be reported in
the year subsequent to an accident year. 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 shows the number of BI claims reported at the end of the accident period and one year later:
California Bodily Injury Claim Count Development Table
Number of claims reported Cumulative number of Percentage increase
for that accident year as of claims reported at in number of claims
Accident year December 31 of that accident year December 31 one year later reported one year later
2002 31,356 34,355 9.6%
2003 33,043 36,314 9.9%
2004 35,084 37,246 6.2%
2005 34,845 36,802 5.6%
2006 34,455 37,098 7.7%
There are many potential factors that can affect the number of claims reported after a period end including changes in weather patterns,
a reduction in the number of litigated files, whether the last day of the year falls on a weekday or a weekend and vehicle safety improvements.
However, the Company is unable to determine which, if any, of the factors actually impacted the number of claims reported and, if so, by what
magnitude.
At December 31, 2007, there were 33,378 California BI claims reported for the 2007 accident year and the Company estimates that these will
ultimately grow by 6.8% to approximately 35,638 claims. The Company believes that while actual development in recent years has ranged between
roughly 5% and 10%, it is reasonable to expect that the range could be as great as 3% to 12%. However, actual development may be more or less
than the expected amount.
The following table shows the effect should the actual amount of claims reported develop differently within the broader reasonably possible
range than what the Company recorded at December 31, 2007:
California Bodily Injury Claim Count Reserve Sensitivity Analysis
Amount recorded Total expected Total expected
at 12/31/07 at 6.8% amount if claim count amount if claim count
2007 accident year Claims reported claim count development development is 3% development is 12%
Claim count 33,378 35,638 34,380 37,383
Approximate average
cost per claim Not meaningful $ 7,450 $ 7,450 $ 7,450
Total dollars Not meaningful $ 265,500,000 $ 256,100,000 $ 278,500,000
Total loss redundancy (deficiency) $ 9,400,000 $ (13,000,000)
3. VARIABILITY BETWEEN THE COMPANY’S LOSS EXPERIENCE AND INDUSTRY AVERAGES FOR THOSE LINES OF
BUSINESS WHERE THERE IS A HEAVY RELIANCE ON INDUSTRY AVERAGES TO ESTABLISH RESERVES, PRIMARILY
NEW JERSEY BODILY INJURY CLAIMS
New Jersey is a no-fault state, which means that the majority of medical costs are paid directly by a policyholder’s insurance company rather
than by the insurance company of the person who was at-fault in the accident. This coverage is known as personal injury protection (“PIP”) and
in New Jersey the standard policy has a statutory limit of $250,000 per person. In New Jersey, the BI coverage provides compensation for “pain
and suffering” that is above and beyond the normal medical costs that are provided by the PIP coverage. The PIP limits are very high in New
Jersey and the BI cases are often more complicated and expensive than in other states, therefore they tend to take longer to settle. Consequently,
establishing a reserve for these coverages in New Jersey is generally more difficult than in most of the Company’s other states. Adding to the
reserving difficulty is the fact that the Company has a very short operating history in New Jersey, underwriting personal automobile insurance
only since the fall of 2003.
As a result of the lack of sufficient operating history, the Company has relied on industry loss data to determine the ultimate losses for the BI
and PIP coverages in New Jersey. The reserve approach utilized for New Jersey assumes that there will not be significantly more development on
the 2004 accident year claims, due to the maturity of those claims, and that the relationship between Company loss data and industry loss data