Mercury Insurance 2015 Annual Report Download - page 46

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(1) Inflation
For the Company’s California automobile lines of insurance business, total reserves are comprised of the following:
• BI reserves—approximately 60% of total reserves
• Material damage ("MD") reserves, including collision and comprehensive property damage—approximately
20% of total reserves
• Loss adjustment expenses reserves—approximately 20% of total reserves.
Loss development on MD reserves is generally insignificant because MD claims are generally settled in a shorter period
than BI claims. The majority of the loss adjustment expenses reserves are estimated costs to defend BI claims, which tend to
require longer periods of time to settle as compared to MD claims.
BI loss reserves are generally the most difficult to estimate because they take longer to close than other coverages. BI
coverage in the Company’s policies includes injuries sustained by any person other than the insured, except in the case of uninsured
or underinsured motorist BI coverage, which covers damages to the insured for BI caused by uninsured or underinsured motorists.
BI payments are primarily for medical costs and general damages.
The following table presents the typical closure patterns of BI claims in the Company's California personal automobile
insurance coverage:
% of Total
Claims Closed Dollars Paid
BI claims closed in the accident year reported 44% 15%
BI claims closed one year after the accident year reported 81% 56%
BI claims closed two years after the accident year reported 94% 81%
BI claims closed three years after the accident year reported 98% 93%
BI claims closed in the accident year reported are generally the smaller and less complex claims that settle for approximately
$3,000 to $3,500, on average, whereas the total average settlement, once all claims are closed in a particular accident year, is
approximately $10,000 to $11,000. 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 loss 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 loss reserves
established for that accident year. Consequently, there is a decreasing likelihood of loss reserve development on any particular
accident year, as those periods age. At December 31, 2015, the accident years that are most likely to develop are the 2013 through
2015 accident years; however, it is 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 reasonable to expect inflation to continue. Many
potential factors can affect the BI inflation rate, including changes in claims handling process, changes in statutes and regulations,
the number of litigated files, increased use of medical procedures such as MRIs and epidural injections, general economic factors,
timeliness of claims adjudication, vehicle safety, weather patterns, and gasoline prices, among other factors; however, the magnitude
of the impact of such factors on the inflation rate is unknown.
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 2015, 2014, and 2013, respectively. At December 31, 2015, the loss severity for the
amounts recorded at December 31, 2014 changed by (2.7)%, 1.7%, and 1.3% for the 2014, 2013, and 2012 accident years,
respectively. Comparatively, at December 31, 2014, the loss severity for the amounts recorded at December 31, 2013 changed by
(3.1)%, (1.3)%, and 0.4% for the 2013, 2012, and 2011 accident years, respectively.