-11-
to occurrence-based policies during the years in issue. In those
years, petitioner followed the same procedures in establishing
its annual statement unpaid losses that it had used in prior
years. It gave data to Tillinghast which Tillinghast used to
make development method9 and pure premium method10 projections.
In the property and casualty industry, "development" is the
actual experience (both paid and unpaid) regarding a loss
estimate over time.
The number of petitioner's claims greatly increased in 1990
and remained at a higher level for 1991 and 1992. The severity
(i.e., the average cost per claim) of petitioner's claims also
increased in 1991 and 1992.
Tillinghast's 1991 and 1992 loss reserve reviews used a
range bounded by a high and low end estimate of projected
ultimate losses. The bounds of Tillinghast's range are the sums
of the high and low end estimates of ultimate loss for each
coverage year, at the December 31 valuation date. Tillinghast's
9 Under the development method, a series of loss development
factors (one for each "age" of coverage year, e.g., coverage year
+ 0 is the current year, coverage year + 1 is the preceding year,
coverage year + 2 is the second preceding year) are developed
based on the past experience of a given coverage year's paid or
incurred losses over time. These factors are then multiplied by
the paid or incurred losses as of the annual statement date for
the corresponding age of coverage year.
10 The pure premium method projects expected losses by
multiplying historical average losses per exposure unit; e.g.,
per doctor by the number of exposure units covered for the
coverage year.
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Last modified: May 25, 2011