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11. Property and Casualty Insurance Activity

12 Months Ended

Dec. 31, 2019

11. Property and Casualty Insurance Activity

Premiums written, ceded and earned are as follows:

	Direct			Assumed			Ceded			Net

Year ended December 31, 2019
Premiums written	$	171,214,091		$	939		$	(45,635,899	)	$	125,579,131
Change in unearned premiums		(11,350,864	)		(243	)		13,395,418			2,044,311
Premiums earned	$	159,863,227		$	696		$	(32,240,481	)	$	127,623,442

Year ended December 31, 2018
Premiums written	$	146,716,468		$	1,004		$	(26,923,679	)	$	119,793,793
Change in unearned premiums		(13,388,535	)		4,067			(2,994,610	)		(16,379,078	)
Premiums earned	$	133,327,933		$	5,071		$	(29,918,289	)	$	103,414,715

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of December 31, 2019 and December 31, 2018 was $3,191,512 and $2,107,629, respectively.

The components of the liability for loss and LAE expenses and related reinsurance receivables as of December 31, 2019 and 2018 are as follows:

	Gross		Reinsurance
	Liability		Receivables
December 31, 2019
Case-basis reserves	$	48,688,643	$	12,894,469
Loss adjustment expenses		12,606,236		1,416,686
IBNR reserves		19,203,732		1,417,070
Recoverable on unpaid losses				15,728,225
Recoverable on paid losses		-		5,384,325
Total loss and loss adjustment expenses	$	80,498,611		21,112,550
Unearned premiums				19,637,988
Total reinsurance receivables			$	40,750,538

December 31, 2018
Case-basis reserves	$	35,812,037	$	12,283,616
Loss adjustment expenses		9,102,862		1,433,170
IBNR reserves		11,282,207		1,954,461
Recoverable on unpaid losses				15,671,247
Recoverable on paid losses		-		4,453,298
Total loss and loss adjustment expenses	$	56,197,106		20,124,545
Unearned premiums				6,242,570
Total reinsurance receivables			$	26,367,115

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and LAE:

	Years ended
	December 31,
	2019			2018

Balance at beginning of period	$	56,197,106		$	48,799,622
Less reinsurance recoverables		(15,671,247	)		(16,748,908	)
Net balance, beginning of period		40,525,859			32,050,714

Incurred related to:
Current year		79,044,301			57,143,077
Prior years		11,138,023			1,152,128
Total incurred		90,182,324			58,295,205

Paid related to:
Current year		42,861,207			34,025,387
Prior years		23,076,588			15,794,673
Total paid		65,937,795			49,820,060

Net balance at end of period		64,770,387			40,525,859
Add reinsurance recoverables		15,728,224			15,671,247
Balance at end of period	$	80,498,611		$	56,197,106

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $12,769,015 and $14,482,712 for the years ended December 31, 2019 and 2018, respectively.

Prior year incurred loss and LAE development is based upon estimates by line of business and accident year. Prior year loss and LAE development incurred during the years ended December 31, 2019 and 2018 was $11,138,023 unfavorable and $1,152,128 unfavorable, respectively. During the year ended December 31, 2019, the Company increased case reserves for a significant number of older liability claims, which primarily affected the ultimate loss projections for commercial lines business. This was in response to management’s detailed review of open liability claims that resulted in new assessments of carried case and incurred but not reported (“IBNR”) reserve levels, giving consideration to both Company and industry trends.

Loss and LAE reserves

The reserving process for loss and LAE reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and LAE incurred, including settlement and administration of losses, and is based on facts and circumstances then known including losses that have occurred but that have not yet been reported. The process relies on standard actuarial reserving methodologies, judgments relative to estimates of ultimate claim severity and frequency, the length of time before losses will develop to their ultimate level (‘tail’ factors), and the likelihood of changes in the law or other external factors that are beyond the Company’s control. Several actuarial reserving methodologies are used to estimate required loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the cumulative combination of the best estimates made by line of business, accident year, and loss and LAE. The amount of loss and LAE reserves for individual reported claims (the “case reserve”) is determined by the claims department and changes over time as new information is gathered. Such information is critical to the review of appropriate IBNR reserves and includes a review of coverage applicability, comparative liability on the part of the insured, injury severity, property damage, replacement cost estimates, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and LAE reserves for unreported claims and development on known claims (IBNR reserves) are determined using historical information aggregated by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.

Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. On at least a quarterly basis, the Company reviews by line of business existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior periods. Several methods are used, varying by line of business and accident year, in order to select the estimated period-end loss reserves. These methods include the following:

Paid Loss Development – historical patterns of paid loss development are used to project future paid loss emergence in order to estimate required reserves.

Incurred Loss Development – historical patterns of incurred loss development, reflecting both paid losses and changes in case reserves, are used to project future incurred loss emergence in order to estimate required reserves.

Paid Bornhuetter-Ferguson (“BF”) – an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been paid, based on historical paid loss development patterns. The estimate of required reserves assumes that the remaining unpaid portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of paid losses exists at the early stages of the claims development process.

Incurred Bornhuetter-Ferguson (“BF”) - an estimated loss ratio for a particular accident year is determined, and is weighted against the portion of the accident year claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that the remaining unreported portion of a particular accident year will pay out at a rate consistent with the estimated loss ratio for that year. This method can be useful for situations where an unusually high or low amount of reported losses exists at the early stages of the claims development process.

Incremental Claim-Based Methods – historical patterns of incremental incurred losses and paid LAE during various stages of development are reviewed and assumptions are made regarding average loss and LAE development applied to remaining claims inventory. Such methods more properly reflect changes in the speed of claims closure and the relative adequacy of case reserve levels at various stages of development. These methods may provide a more accurate estimate of IBNR for lines of business with relatively few remaining open claims but for which significant recent settlement activity has occurred.

Frequency / Severity Based Methods – historical measurements of claim frequency and average paid claim size (severity) are reviewed for more mature accident years where a majority of claims have been reported and/or closed. These historical averages are trended forward to more recent periods in order to estimate ultimate losses for newer accident years that are not yet fully developed. These methods are useful for lines of business with slow and/or volatile loss development patterns, such as liability lines where information pertaining to individual cases may not be completely known for many years. The claim frequency and severity information for older periods can then be used as reasonable measures for developing a range of estimates for more recent immature periods.

Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of methods based on the line of business and accident year being projected. In some cases, additional methods or historical data from industry sources are employed to supplement the projections derived from the methods listed above.

Two key assumptions that materially affect the estimate of loss reserves are the loss ratio estimate for the current accident year used in the BF methods described above, and the loss development factor selections used in the loss development methods described above. The loss ratio estimates used in the BF methods are selected after reviewing historical accident year loss ratios adjusted for rate changes, trend, and mix of business.

The Company is not aware of any claim trends that have emerged or that would cause future adverse development that have not already been contemplated in setting current carried reserves levels.

In New York State, lawsuits for negligence are subject to certain limitations and must be commenced within three years from the date of the accident or are otherwise barred. Accordingly, the Company’s exposure to unreported claims (“pure” IBNR) for accident dates of December 31, 2016 and prior is limited, although there remains the possibility of adverse development on reported claims (“case development” IBNR). In certain rare circumstances states have retroactively revised a statute of limitations. The Company is not aware of any such effort that would have a material impact on the Company’s results.

The following is information about incurred and paid claims development as of December 31, 2019, net of reinsurance, as well as the cumulative reported claims by accident year and total IBNR reserves as of December 31, 2019 included in the net incurred loss and allocated expense amounts. The historical information regarding incurred and paid claims development for the years ended December 31, 2010 to December 31, 2018 is presented as supplementary unaudited information.

All Lines of Business

(in thousands, except reported claims data)

	Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance																				As of
	For the Years Ended December 31,																				December 31, 2019
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR			Cumulative Number of Reported Claims by Accident Year
	(Unaudited 2010 - 2018)
2010	$	5,598	$	5,707	$	6,429	$	6,623	$	6,912	$	6,853	$	6,838	$	6,840	$	6,787	$	6,788	$	(4	)		1,617
2011				7,603		7,678		8,618		9,440		9,198		9,066		9,144		9,171		9,127		(2	)		1,914
2012						9,539		9,344		10,278		10,382		10,582		10,790		10,791		11,015		77			4,704	(1)
2013								10,728		9,745		9,424		9,621		10,061		10,089		10,607		98			1,561
2014										14,193		14,260		14,218		14,564		15,023		16,381		249			2,134
2015												22,340		21,994		22,148		22,491		23,386		228			2,555
2016														26,062		24,941		24,789		27,887		414			2,875
2017																31,605		32,169		35,304		847			3,375
2018																		54,455		56,351		2,771			4,178
2019																				75,092		19,458			4,225
																	Total		$	271,938
(1) Reported claims for accident year 2012 includes 3,406 claims from Superstorm Sandy.

All Lines of Business

(in thousands)

	Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2010		2011		2012			2013		2014		2015		2016		2017		2018		2019
	(Unaudited 2010 - 2018)

2010	$	2,566	$	3,947	$	4,972		$	5,602	$	6,323	$	6,576	$	6,720	$	6,772	$	6,780	$	6,785
2011				3,740		5,117			6,228		7,170		8,139		8,540		8,702		8,727		8,789
2012						3,950			5,770		7,127		8,196		9,187		10,236		10,323		10,428
2013									3,405		5,303		6,633		7,591		8,407		9,056		9,717
2014											5,710		9,429		10,738		11,770		13,819		14,901
2015													12,295		16,181		18,266		19,984		21,067
2016															15,364		19,001		21,106		23,974
2017																	16,704		24,820		28,693
2018																			32,383		44,516
2019																					40,933
																		Total		$	209,803

Net liability for unpaid loss and allocated loss adjustment expenses for the accident years presented						$	62,135
All outstanding liabilities before 2010, net of reinsurance							98
Liabilities for loss and allocted loss adjustment expenses, net of reinsurance						$	62,233

Reported claim counts are measured on an occurrence or per event basis. A single claim occurrence could result in more than one loss type or claimant; however, the Company counts claims at the occurrence level as a single claim regardless of the number of claimants or claim features involved.

The reconciliation of the net incurred and paid claims development tables to the liability for loss and LAE reserves in the consolidated balance sheet is as follows:

	As of
*(in thousands)*	December 31, 2019
Liabilities for loss and loss adjustment expenses, net of reinsurance	$	62,233
Total reinsurance recoverable on unpaid losses		15,728
Unallocated loss adjustment expenses		2,538
Total gross liability for loss and LAE reserves	$	80,499

The following is supplementary unaudited information about average historical claims duration as of December 31, 2019:

	Average Annual Percentage Payout of Incurred Loss and Allocated Loss Adjustment Expenses by Age, Net of Reinsurance (unaudited)
Years		1		2		3		4		5		6		7		8		9		10

All Lines of Business		44.9	%	18.5	%	10.9	%	8.9	%	9.2	%	6.1	%	2.7	%	0.7	%	0.4	%	0.1	%

The percentages in the above table do not add up to 100% because the percentages represent averages across all accident years at each development stage.