Mercury Insurance 2010 Annual Report Download - page 48

Download and view the complete annual report

Please find page 48 of the 2010 Mercury Insurance annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126

The Company is not able to determine the impact of any of the regulatory matters described above. It is
possible that the impact of some of the changes could adversely affect the Company and its operating results,
however, the ultimate outcome is not expected to be material to the Company’s financial position.
The Company supported Proposition 17, a California initiative on the June 2010 ballot which did not pass. It
would have provided for a portable persistency discount, allowing insurance companies to offer new customers
discounts based on having continuous insurance coverage from any insurance company. Currently, the California
DOI allows insurance companies to provide persistency discounts based on continuous coverage only with
existing customers. The Company made financial contributions of $12.1 million and $3.5 million in 2010 and
2009, respectively, related to this initiative. The Company continues to offer a competitive product in California.
The Company is also involved in legal proceedings incidental to its insurance business. See Note 17 of
Notes to Consolidated Financial Statements—Commitments and Contingencies—Litigation.
C. Critical Accounting Estimates
Reserves
The preparation of the Company’s consolidated financial statements requires judgment and estimates. The
most significant is the estimate of loss reserves. Estimating loss reserves is a difficult process as many factors can
ultimately affect the final settlement of a claim and, therefore, the reserve that is required. Changes in the
regulatory and legal environment, results of litigation, medical costs, the cost of repair materials, and labor rates,
among other factors, can all impact ultimate claim costs. In addition, time can be a critical part of reserving
determinations since the longer the span between the incidence of a loss and the payment or settlement of a
claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property
damage claims, tend to be more reasonably predictable than long-tail liability claims.
The Company calculates a point estimate rather than a range of loss reserve estimate. There is inherent
uncertainty with estimates and this is particularly true with estimates for loss reserves. This uncertainty comes
from many factors which may include changes in claims reporting and settlement patterns, changes in the
regulatory or legal environment, uncertainty over inflation rates and uncertainty for unknown items. The
Company does not make specific provisions for these uncertainties, rather it considers them in establishing its
reserve by looking at historical patterns and trends and projecting these out to current reserves. The underlying
factors and assumptions that serve as the basis for preparing the reserve estimate include paid and incurred loss
development factors, expected average costs per claim, inflation trends, expected loss ratios, industry data, and
other relevant information.
The Company also engages independent actuarial consultants to review the Company’s reserves and to
provide the annual actuarial opinions required under state statutory accounting requirements. The Company does
not rely on actuarial consultants for GAAP reporting or periodic report disclosure purposes. The Company
analyzes loss reserves quarterly primarily using the incurred loss, claim count, and average severity methods
described below. The Company also uses the paid loss development method to analyze loss adjustment expenses
reserves as part of its reserve analysis. When deciding which method to use in estimating its reserves, the
Company evaluates the credibility of each method based on the maturity of the data available and the claims
settlement practices for each particular line of business or coverage within a line of business. When establishing
the reserve, the Company will generally analyze the results from all of the methods used rather than relying on
one method. While these methods are designed to determine the ultimate losses on claims under the Company’s
policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes.
The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.
• The incurred loss development method analyzes historical incurred case loss (case reserves plus paid
losses) development to estimate ultimate losses. The Company applies development factors against
38