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Management’s Discussion (Continued)<br />
Property and casualty losses (Continued)<br />
GEICO (Continued)<br />
when adjusters have insufficient time and information to make specific claim estimates and for a large number of minor<br />
physical damage claims that are paid within a relatively short time after being reported. Average reserve amounts are driven by<br />
the estimated average severity per claim and the number of new claims opened.<br />
Our claims adjusters generally establish individual liability claim case loss and loss adjustment expense reserve estimates<br />
as soon as the specific facts and merits of each claim can be evaluated. Case reserves represent the amounts that in the judgment<br />
of the adjusters are reasonably expected to be paid in the future to completely settle the claim, including expenses. Individual<br />
case reserves are revised over time as more information becomes known.<br />
For most liability coverages, case reserves alone are an insufficient measure of the ultimate cost due in part to the longer<br />
claim-tail, the greater chance of protracted litigation and the incompleteness of facts available at the time the case reserve is<br />
established. Therefore, we establish additional case development reserve estimates, which are usually percentages of the case<br />
reserve. As of December 31, 2013, case development reserves averaged approximately 25% of total established case reserves. In<br />
general, case development factors are selected by a retrospective analysis of the overall adequacy of historical case reserves.<br />
Case development factors are reviewed and revised periodically.<br />
For unreported claims, IBNR reserve estimates are calculated by first projecting the ultimate number of claims expected<br />
(reported and unreported) for each significant coverage by using historical quarterly and monthly claim counts to develop ageto-age<br />
projections of the ultimate counts by accident quarter. Reported claims are subtracted from the ultimate claim projections<br />
to produce an estimate of the number of unreported claims. The number of unreported claims is multiplied by an estimate of the<br />
average cost per unreported claim to produce the IBNR reserve amount. Actuarial techniques are difficult to apply reliably in<br />
certain situations, such as to new legal precedents, class action suits or recent catastrophes. Consequently, supplemental IBNR<br />
reserves for these types of events may be established through the collaborative effort of actuarial, claims and other management<br />
personnel.<br />
For each significant coverage, we test the adequacy of the total loss reserves using one or more actuarial projections based<br />
on claim closure models, paid loss triangles and incurred loss triangles. Each type of projection analyzes loss occurrence data<br />
for claims occurring in a given period and projects the ultimate cost.<br />
Unpaid loss and loss adjustment expense estimates recorded at the end of 2012 developed downward by $238 million when<br />
reevaluated through December 31, 2013, producing a corresponding increase to pre-tax earnings in 2013. These downward<br />
reserve developments represented approximately 1.3% of earned premiums in 2013 and approximately 2.3% of prior year-end<br />
recorded liabilities. Reserving assumptions at December 31, 2013 were modified appropriately to reflect the most recent<br />
frequency and severity results. Future reserve development will depend on whether actual frequency and severity are more or<br />
less than anticipated.<br />
Within the automobile line of business, reserves for liability coverages are more uncertain due to the longer claim-tails.<br />
Approximately 92% of GEICO’s reserves as of December 31, 2013 were for automobile liability, of which bodily injury (“BI”)<br />
coverage accounted for approximately 55%. We believe it is reasonably possible that the average BI severity will change by at<br />
least one percentage point from the severity used. If actual BI severity changes one percentage point from what was used in<br />
establishing the reserves, our reserves would develop up or down by approximately $165 million resulting in a corresponding<br />
decrease or increase in pre-tax earnings. Many of the same economic forces that would likely cause BI severity to be different<br />
from expected would likely also cause severities for other injury coverages to differ in the same direction.<br />
GEICO’s exposure to highly uncertain losses is believed to be limited to certain commercial excess umbrella policies<br />
written during a period from 1981 to 1984. Remaining liabilities associated with such exposure are currently a relatively<br />
insignificant component of GEICO’s total reserves (approximately 1.3%) and there is minimal apparent asbestos or<br />
environmental liability exposure. Related claim activity over the past year was insignificant.<br />
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