Mercury Insurance 2010 Annual Report Download - page 50

BI claims closed in the accident year reported are generally the smaller and less complex claims that settle
for approximately $2,500 to $3,000, on average, whereas the total average settlement, once all claims are closed
in a particular accident year, is approximately $7,500 to $9,000. The Company creates incurred and paid loss
triangles to estimate ultimate losses utilizing historical payment and reserving patterns and evaluates the results
of this analysis against its frequency and severity analysis to establish BI reserves. The Company adjusts
development factors to account for inflation trends it sees in loss severity. As a larger proportion of claims from
an accident year are settled, there becomes a higher degree of certainty for the reserves established for that
accident year. Consequently, there is a decreasing likelihood of reserve development on any particular accident
year, as those periods age. At December 31, 2010, the Company believes that the accident years that are most
likely to develop are the 2008 through 2010 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:
claims handling process, statutes and regulations, the number of litigated files, general economic factors,
timeliness of claims adjudication, vehicle safety, weather patterns, and gasoline prices, among other factors;
however, the magnitude of such impact on the inflation rate is unknown.
It is a common practice in the insurance industry for companies to provide small settlement offers at the
inception of a claim to BI claimants who have minor injuries. These claims are settled quickly, reducing the
likelihood that BI claimants require larger settlements later on. It also results in some claimants receiving
payments that would not have received any payments if an extended adjudication of the claim had occurred.
When a large percentage of the total claims are small dollar value claims resulting from this practice, it has the
effect of lowering the total average cost for all claims (severity) but increasing the total number of claims
(frequency). Mercury has historically used this approach to handle its BI claims.
Beginning late in 2008 and continuing through the end of 2009, the Company changed its claims handling
procedures and discontinued the practice of providing small settlement offers to BI claimants at the inception of
the claim. This had the effect of increasing loss severity and decreasing loss frequency for the 2009 accident
year. The prior practice was reinstated in 2010, which resulted in decreased loss severity and increased loss
frequency in 2010 compared to 2009. As a result, the loss severity comparisons from 2008 through 2010 are
skewed, with 2009 showing much higher severities than had been the trend and 2010 showing a negative
inflation trend when compared to 2009. Consequently, the Company believes that inflation trend comparison
between 2010 and 2008, when the same claims handling process was practiced, is more indicative of the actual
severity trend. This comparison indicates an annualized inflation trend of 2.1%.
The Company believes that it is reasonably possible that the California automobile BI severity could vary
from recorded amounts by as much as 10%, 5%, and 3% for 2010, 2009, and 2008, respectively. For example, at
December 31, 2010, the loss severity for the amounts recorded at December 31, 2009 decreased by 2.6%, 0.8%
and 0.1% for the 2009, 2008, and 2007 accident years, respectively. Comparatively, at December 31, 2009, the
loss severity decreased for the amount recorded at December 31, 2008 by 8.5%, 3.1%, and 0.1% for the 2008,
2007, and 2006 accident years, respectively. The following table presents the effects on the 2010, 2009, and 2008
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.
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