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Liability for Unpaid Loss and LAE
 12 Months Ended
Dec. 31, 2011
Liability for Unpaid Loss and LAE

9. Liability for Unpaid Loss and LAE

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and LAE, reported in the accompanying consolidated balance sheets as of December 31, 2011 and 2010:

     
(Amounts in Thousands)   2011   2010   2009
Unpaid losses and LAE, gross of related reinsurance recoverables at beginning of year   $ 1,263,537     $ 1,091,944     $ 1,014,059  
Less: Reinsurance recoverables at beginning of year     670,877       561,874       504,404  
Net balance, beginning of year     592,660       530,070       509,655  
Incurred related to:
                           
Current year     665,812       463,535       332,598  
Prior year     12,521       7,946       (4,827 ) 
Total incurred losses during the year     678,333       471,481       327,771  
Paid losses and LAE related to:
                           
Current year     (390,267 )      (222,593 )      (203,210 ) 
Prior year     (179,721 )      (187,012 )      (109,872 ) 
Total payments for losses and LAE     (569,988 )      (409,605 )      (313,082 ) 
Commuted loss reserves     —       1,350       4,612  
Net balance, December 31     701,005       593,296       528,956  
Acquired outstanding loss and loss adjustment reserve     209,651       —       —  
Effect of foreign exchange rates     (3,873 )      (636 )      1,114  
Plus reinsurance recoverables at end of year     972,392       670,877       561,874  
Unpaid losses and LAE, gross of related reinsurance recoverables at end of year   $ 1,879,175     $ 1,263,537     $ 1,091,944  

In 2011, the Company’s liabilities for unpaid losses and LAE attributable to prior years increased by $12,521 primarily as result of unfavorable loss development, in its Specialty Program segment due to higher actuarial estimates based on actual losses. In 2010, the Company’s liabilities for unpaid losses and LAE attributable to prior years increased by $7,946 primarily as result of unfavorable loss development, in its Specialty Program segment due to higher actuarial estimates based on actual losses. In 2009, the Company’s liabilities for unpaid losses and LAE attributable to prior years decreased by $4,827 primarily as result of favorable development in both the Small Commercial Business segment and Specialty Risk and Extended Warranty segment partially offset by unfavorable development in our Specialty Program Business segment as well as the Company’s involuntary participation in NCCI pools. In setting its reserves, the Company utilizes a combination of Company loss development factors and industry-wide loss development factors. In the event that the Company’s losses develop more favorably than the industry, as a whole, the Company’s liabilities for unpaid losses and LAE should decrease. Management believes that its use of both its historical experience and industry-wide loss development factors provide a reasonable basis for estimating future losses. As the Company has written more business and developed more credible data, the Company has assigned more weight to its historical experience than to industry-wide results. In either case, future events beyond the control of management, such as changes in law, judicial interpretations of law, and inflation may favorably or unfavorably impact the ultimate settlement of the Company’s loss and LAE.

The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated changes in claim costs due to inflation are considered in estimating the ultimate claim costs, the increase in average severity of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary.