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adverse development reserve. The adverse development reserve is
established by its CEO and president, Joseph H. Bixler (Bixler),
and its controller to address the possibility that the reserves
set by the claim department might be understated because of the
discovery of new information or unforeseeable events. This
reserve is a “bulk” reserve rather than one calculated case by
case.9 For the years in issue, the adverse development
reserves, when added to petitioner’s case reserves, increased
petitioner’s total unpaid loss reserves by amounts ranging from
about 37 percent to about 50 percent.
For estimated claims under $100,000, the adverse
development reserve includes an amount that represents a
percentage of such claims. The percentage varies from year to
year and reflects at least an element of judgment or
subjectivity. Petitioner operates under the principle that as
the claims mature and more information is known about them, it
can develop a higher expectation of accuracy on its case
reserve. Consequently, in computing its adverse development
reserve, petitioner includes a higher percentage of open claims
from the most current claim year and a smaller percentage for
each succeeding older year. For each year in issue, petitioner
9 On its annual statement, petitioner’s adverse development
reserve is labeled as “Bulk + IBNR”. The term “IBNR” stands for
“incurred but not reported”. Petitioner did not compute an IBNR
reserve because it considered only reported claims in its reserve
analysis.
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