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three categories of loss reserves: (1) Case reserves, which
reflect estimates of amounts to be paid to resolve claims that
have been reported to petitioner; (2) incurred but not yet
reported (IBNR) reserves, which reflect estimates of amounts to
be paid to resolve claims statistically presumed to have been
incurred but not yet reported to petitioner; and (3) loss
adjustment expense (LAE) reserves, which reflect estimates of
administrative costs to be paid in settling or otherwise
resolving claims. For the years in issue, case reserves
constituted the majority of petitioner's loss reserves.
Petitioner established its case reserves by assigning a
claims adjuster to examine each reported claim and estimate the
ultimate amount, if any, that would be paid to resolve it. Case
reserves simply comprised the aggregate of those estimates.
Overall, petitioner's case reserves totaled $255,655,141 at
yearend 1985 and $277,705,661 at yearend 1986.
Petitioner established its IBNR reserves by applying a
"counts and averages" methodology to each line of insurance
business. Under this method, petitioner computed its IBNR
reserves by multiplying (1) the number of claims that it presumed
would be reported after the accident year by (2) the average cost
it projected to resolve each late-reported claim. Petitioner
based its estimate of these numbers on its experience in prior
accident years and then adjusted the results to reflect actuarial
quarterly reviews of the loss reserves for the preceding year.
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