-13-
applied to open claims from the most current claim year a factor
that was between roughly 35 and 45 percent; this factor was then
reduced for each succeeding older claim year.10 For claims over
$100,000, petitioner makes a separate and additional allowance
in the adverse development reserve based not upon any percentage
factor but rather upon a subjective assessment of the number of
such losses and how much they might cost.11
Petitioner's adverse development reserves for the years in
issue were as follows:
Year Amount
1993 $3,155,000
1994 3,748,000
1995 14,048,000
1 For 1995, petitioner included in its adverse development reserve, for
the first time, an additional component, “unallocated loss expenses unpaid”,
in the amount of $532,000.
Petitioner’s Reserve Experience
For each of the years 1982 through 1985, petitioner's
initial estimates of losses turned out to be lower than actual
losses. For each of the years 1986 through 1995, petitioner’s
10 For example, to compute the adverse development reserve
for 1995, petitioner applied a factor of approximately 45 percent
to its case reserve estimate for open 1995 claims, a factor of
approximately 40 percent for open 1994 claims, a factor of
approximately 38 percent for open 1993 claims, and so on. The
adverse development reserve for 1995 is the sum of the separately
computed adverse development reserve amounts for each year with
open claims as of Dec. 31, 1995.
11 The record does not reveal the mechanics of this separate
and additional allowance for claims over $100,000.
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