Mercury Insurance 2011 Annual Report Download - page 63

At December 31, 2011, there were 27,977 BI claims reported for the 2011 accident year and the Company
estimates that these are expected to ultimately grow by 2.6%. The Company believes that while actual
development in recent years has ranged between approximately 2% and 4%, it is reasonable to expect that the
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, 2011:
California Bodily Injury Claim Count Reserve Sensitivity Analysis
2011 Accident Year Claims Reported
Amount Recorded
at 12/31/11 at 2.6%
Claim Count
Development
Total Expected
Amount If Claim
Count Development is
0%
Total Expected
Amount If Claim
Count Development is
10%
Claim Count ................... 27,977 28,711 27,977 30,775
Approximate average cost per
claim ....................... Notmeaningful $ 8,450 $ 8,450 $ 8,450
Total dollars ................... Notmeaningful $242,608,000 $236,406,000 $260,049,000
Total Loss Development—Favorable (Unfavorable) ... $ 6,202,000 $ (17,441,000)
(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 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. The Company may experience additional development on these reserves.
Discussion of losses and loss reserves and prior period loss development at December 31, 2011
At December 31, 2011 and 2010, the Company recorded its point estimate of approximately $985 million
and $1,034 million, respectively, in losses and loss adjustment expenses liabilities which include approximately
$344 million and $308 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, 2011 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 2011, the Company experienced severe losses due to Georgia tornadoes, Hurricane Irene, and
California winter storms occurring between November 30 and December 3, which resulted in increased
homeowners and automobile claims. The Company estimates that total losses from these storms are
approximately $18 million.
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