Mercury Insurance 2011 Annual Report Download - page 62

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California Bodily Injury Inflation Reserve Sensitivity Analysis
Accident
Year
Number of
Claims
Expected
Actual
Recorded
Severity at
12/31/11
Implied
Inflation Rate
Recorded(1)
(A) Pro-forma
severity if actual
severity is lower by
10% for 2011,
7% for 2010, and
5% for 2009
(B) Pro-forma
severity if actual
severity is higher by
10% for 2011,
7% for 2010, and
5% for 2009
Favorable loss
development if
actual severity is
less than recorded
(Column A)
Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
2011 .... 26,634 $8,450 -2.1% $7,605 $9,295 $22,506,000 $(22,506,000)
2010 .... 26,946 $8,632 -3.4% $8,028 $9,236 $16,275,000 $(16,275,000)
2009 .... 25,526 $8,933 13.2% $8,486 $9,380 $11,410,000 $(11,410,000)
2008 .... N/A $7,891 — — — — —
Total Loss Development—Favorable (Unfavorable) $50,191,000 $(50,191,000)
(1) The change in the implied inflation rate in 2010 and 2009 is skewed by the change in claims handling
process noted above. The Company believes the comparison between 2011 and 2008 is more indicative of
the actual severity trend. This results in an annualized implied inflation rate of 2.4%.
(2) Claim Count Development
The Company generally estimates ultimate claim counts for an accident period based on development of
claim counts in prior accident periods. For California automobile BI claims, the Company has experienced that
approximately 2% to 4% additional claims will be reported in the year subsequent to an accident year. However,
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 presents 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 at December 31
of each accident year
Number of claims
reported at December 31
one year later
Percentage increase in
number of claims
reported
2008 ............ 29,647 30,229 2.0%
2009 ............ 25,684 26,555 3.4%
2010 ............ 28,182 29,090 3.2%
There are many other potential factors that can affect the number of claims reported after a period end.
These factors include changes in weather patterns, a change in the number of litigated files, the number of
automobiles insured, and whether the last day of the year falls on a weekday or a weekend. However, the
Company is unable to determine which, if any, of the factors actually impact the number of claims reported and,
if so, by what magnitude.
42