Mercury Insurance 2009 Annual Report Download - page 58

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year, as those periods age. At December 31, 2009, the Company believes that the accident years that are most
likely to develop are the 2007 through 2009 accident years; however, it is also possible that older accident years
could develop as well.
In general, the Company expects that historical claims trends will continue with costs tending to increase,
which is generally consistent with historical data, and therefore the Company believes that it is more reasonable
to expect inflation than deflation. Many potential factors can affect the BI inflation rate, including: changes in
statutes and regulations, change in the number of litigated files, general economic factors, timeliness of claims
adjudication, vehicle safety, changes in weather patterns, and gasoline prices; however, the magnitude of such
impact on the inflation rate is unknown.
The Company believes that it is reasonably possible that the California automobile BI inflation rate could
vary from recorded amounts by as much as 10%, 5%, and 3% for 2009, 2008, and 2007, respectively. For
example, at December 31, 2009, the loss severity for the amounts recorded at December 31, 2008 decreased by
8.5%, 3.1% and 0.1% for the 2008, 2007, and 2006 accident years, respectively. Comparatively, at December 31,
2008, the loss severity increased for the amount recorded at December 31, 2007 by 5.6%, 3.7%, and 1.5% for the
2007, 2006, and 2005 accident years, respectively. The following table shows the effects on the 2009, 2008, and
2007 accident year California BI loss reserves based on possible variations in the severity recorded, however, the
variation could be more or less than these amounts.
California Bodily Injury Inflation Reserve Sensitivity Analysis
Accident
Year
Number of
Claims
Expected(a)
Actual
Recorded
Severity at
12/31/09
Implied
Inflation Rate
Recorded
(A) Pro-forma
severity if actual
severity is lower by
10% for 2009,
5% for 2008, and
3% for 2007
(B) Pro-forma
severity if actual
severity is higher by
10% for 2009,
5% for 2008, and
3% for 2007
Favorable loss
development if
actual severity is
less than recorded
(Column A)
Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
2009 .... 27,192 $8,938 12.7% $8,044 $9,832 $24,310,000 $(24,310,000)
2008 .... 30,244 $7,928 3.9% $7,532 $8,324 $11,977,000 $(11,977,000)
2007 .... 35,570 $7,631 2.2% $7,402 $7,860 $ 8,146,000 $ (8,146,000)
2006 .... N/A $7,470
Total Loss Development—Favorable (Unfavorable) $44,433,000 $(44,433,000)
(a) The recent downward trend in the total number of claims reported is reflective of declining loss frequencies
and a decline in the number of insurance policies issued. The number of claims expected excludes those
claims that were closed without any payment.
For the 2009 accident year, the Company experienced increases in the average amounts paid on closed
claims and slower claim file closings. This generally indicates that there will be increases in loss severity. As a
result, the Company believes that the inflation rate for the 2009 accident year is likely to be higher than the
inflation rate for the 2008 accident year. As discussed previously, there are many factors that impact inflation,
but their impact on the recent inflation rate is currently unknown.
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