Mercury Insurance 2008 Annual Report Download - page 44

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2. Claims reported variability (Claim Count Development)
The Company generally estimates ultimate claim counts for an accident period based on development of claim counts 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, but 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
Accident year
Number of claims reported for
that accident year as of
December 31 of that accident
year
Number of claims reported at
December 31 one year later
Percentage increase in number
of claims reported
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%
2007 33,378 35,638 6.8%
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 amount 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, 2008, there were 29,647 BI claims reported for the 2008 accident year and the Company estimates that
these are expected to ultimately grow by 7.0% to approximately 31,737 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
to be between 3% and 12%. Actual development may be more or less than the expected range.
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, 2008:
California Bodily Injury Claim Count Reserve Sensitivity Analysis
2008 Accident year Claims reported
Amount recorded at
12/31/08 at 7.0%
claim count
development
Total expected
amount if claim count
development is 3%
Total expected
amount if claim count
development is 12%
Claim Count 29,647 31,737 30,536 33,205
Approximate average cost per claim Not meaningful 8,831$ 8,831$ 8,831$
Total dollars Not meaningful 280,300,000$ 269,700,000$ 293,200,000$
10,600,000$ (12,900,000)$ Total Loss Redundancy (Development)
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” and any out of pocket medical costs not 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 states in which the Company operates. 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.