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35
California Bodily Injury Inflation Reserve Sensitivity Analysis
Accident
Year
Number of
Claims
Expected
Actual
Recorded
Severity at
12/31/13
Implied
Inflation Rate
Recorded (1)
(A) Pro-forma
severity if actual
severity is lower by
10% for 2013,
5% for 2012, and
3% for 2011
(B) Pro-forma
severity if actual
severity is higher
by
10% for 2013,
5% for 2012, and
3% for 2011
Favorable loss
development if
actual severity is
less than recorded
(Column A)
Unfavorable loss
development if
actual severity is
more than recorded
(Column B)
2013 29,369 $ 10,418 6.6% $ 9,376 $ 11,460 $ 30,602,000 $ (30,602,000)
2012 28,016 $ 9,774 5.8% $ 9,285 $ 10,263 $ 13,700,000 $ (13,700,000)
2011 27,095 $ 9,234 3.0% $ 8,957 $ 9,511 $ 7,505,000 $ (7,505,000)
2010 27,076 $ 8,968 — — — — —
Total Loss Development—Favorable (Unfavorable) $ 51,807,000 $ (51,807,000)
(1) Implied inflation rate is calculated by dividing the difference between current and prior year actual recorded severity by
the prior year actual recorded severity.
(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. Since 2006, for California automobile BI claims, the Company has experienced that approximately 2% to
5% 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.
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 period 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.
At December 31, 2013, there were 28,029 BI claims reported for the 2013 accident year and the Company estimates that
these are expected to ultimately grow by approximately 5%. The Company believes that while actual development in recent years
has ranged between approximately 2% to 5%, 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, 2013:
California Bodily Injury Claim Count Reserve Sensitivity Analysis
2013 Accident Year Claims Reported
Amount Recorded
at 12/31/13 at 5%
Claim Count
Development
Total Expected
Amount If Claim
Count Development is
0%
Total Expected
Amount If Claim
Count Development is
10%
Claim count 28,029 29,369 28,029 30,832
Approximate average cost per claim Not meaningful $ 10,418 $ 10,418 $ 10,418
Total dollars Not meaningful $ 305,966,000 $ 292,006,000 $ 321,208,000
Total Loss Development—Favorable (Unfavorable) $ 13,960,000 $ (15,242,000)
(3) Unexpected Losses From Older Accident Periods
Unexpected 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 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 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