Mercury Insurance 2010 Annual Report Download - page 52

range could be as great as between 0% and 10%. Actual development may be more or less than the expected
range. The following table presents the effect on loss development based on different claim count within the
broader possible range at December 31, 2010:
California Bodily Injury Claim Count Reserve Sensitivity Analysis
2010 Accident Year Claims Reported
Amount Recorded
at 12/31/10 at 2.5%
Claim Count
Development
Total Expected
Amount If Claim
Count Development is
0%
Total Expected
Amount If Claim
Count Development is
10%
Claim Count .................... 28,182 28,877 28,182 31,000
Approximate average cost per claim . . . Not meaningful $ 8,249 $ 8,249 $ 8,249
Total dollars ..................... Notmeaningful $238,200,000 $232,500,000 $ 255,700,000
Total Loss Development—Favorable (Unfavorable) ..... $ 5,700,000 $(17,500,000)
(3) Unexpected Large Losses From Older Accident Periods
Unexpected large losses are generally not provided for in the current reserve because they are not known or
expected and tend to be unquantifiable. Once known, the Company establishes a provision for the losses, but it is
not possible to provide any meaningful sensitivity analysis as to the potential size of any unexpected
losses. These losses can be caused by many factors, including unexpected legal interpretations of coverage,
ineffective claims handling, regulation extending claims reporting periods, assumption of unexpected or
unknown risks, adverse court decisions as well as many unknown factors.
Unexpected large losses are fairly infrequent but can have a large impact on the Company’s losses. To
mitigate this specific risk, the Company has established claims handling and review procedures. However, it is
still possible that these procedures will not prove entirely effective, and the Company may have material
unexpected large losses in future periods. It is also possible that the Company has not identified and established a
sufficient reserve for all unexpected large losses occurring in the older accident years, even though a
comprehensive claims file review was undertaken, or that the Company will experience additional development
on these reserves.
Discussion of losses and loss reserves and prior period loss development at December 31, 2010
At December 31, 2010 and 2009, the Company recorded its point estimate of approximately $1,034 million
and $1,053 million, respectively, in losses and loss adjustment expenses liabilities which include approximately
$308 million and $340 million, respectively, of IBNR loss reserves. IBNR includes estimates, based upon past
experience, of ultimate developed costs which may differ from case estimates, unreported claims which occurred
on or prior to December 31, 2010 and estimated future payments for reopened claims. Management believes that
the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss
adjustment expenses incurred to date; however, since the provisions are necessarily based upon estimates, the
ultimate liability may be more or less than such provisions.
During 2010 and 2009, the Company experienced meaningful increases in homeowners losses related to
sinkhole claims in Florida. These claims have historically been very infrequent, but the cost per claim is high,
averaging approximately $150,000 to $170,000 plus the cost to adjust the claim. The Company estimates that the
total sinkhole related loss and loss adjustment expenses were approximately $20 million, $9 million, and $4
million for accident years 2010, 2009, and 2008, respectively. During this time period, the Company’s Florida
homeowners policies in-force decreased by approximately 10% per year. In addition, the Company recorded a
related premium deficiency reserve of approximately $6 million as of December 31, 2010. The reserve provides
for a loss in 2010 of the estimated portion of losses to be incurred in 2011 that are in excess of the related
unearned premium balance as of December 31, 2010.
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