THG 2018 Annual Report

policies. Estimates for catastrophes which occur at or near the end of a financial reporting period may be even less reliable since we will have less claims data available and little time to complete our estimation process. In such situations, we may adapt our practices to accommodate the circumstances. For events designated as catastrophes which affect our Commercial and Personal Lines business segments, we generally calculate IBNR reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. In addition, loss emergence from similar historical events is compared to the estimated IBNR for our current catastrophe events to help assess the reasonableness of our estimates. Reserving Sensitivity Analysis The following discussion presents disclosure related to possible variation in net reserve estimates due to changes in key assumptions. This information is provided for illustrative purposes only. Many other assumptions may also lead to material reserve adjustments. If any such variations do occur, then they would likely occur over a period of several years and therefore their impact on our results of operations would be recognized during the same periods. It is important to note, however, that there is the potential for future variations greater than the amounts described below and for any such variations to be recognized in a single quarterly or annual period. No consideration has been given to potential correlation or lack of correlation among key assumptions or among lines of business and coverage as described below. As a result and because there are so many other factors which affect our net reserve estimate, it would be inappropriate to take the amounts described below and simply add them together in an attempt to estimate volatility in total. While we believe these are reasonably possible scenarios, the reader should not consider the following sensitivity analysis as illustrative of a net reserve range. x Personal and Commercial Automobile Bodily Injury ± loss reserves recorded for bodily injury on U.S. voluntary business were $635.7 million as of December 31, 2018. A key assumption for bodily injury is the inflation rate underlying the estimated reserve. A five point change (e.g., 4% changed to 9% or -1%) in the embedded inflation rate would have changed total reserves by approximately $79 million, either positive or negative, respectively, at December 31, 2018. x Personal Automobile Personal Injury Protection Medical Payment ± loss reserves recorded for personal injury protection medical payment on U.S. voluntary business were $150.1 million as of December 31, 2018. A key assumption for this coverage is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the embedded inflation rate and a one point change to the tail factor assumption (e.g., 2% changed to 1% or 3%) would have changed total reserves by approximately $47 million, either positive or negative, at December 31, 2018. x :RUNHUV¶ &RPSHQVDWLRQ ± ORVV UHVHUYHV UHFRUGHG IRU ZRUNHUV¶ FRPSHQVDWLRQ RQ 8 6 voluntary business were $420.6 million as of December $ NH\ DVVXPSWLRQ IRU ZRUNHUV¶ FRPSHQVDWLRQ LV WKH LQIODWLRQ UDWH XQGHUO\LQJ WKH HVWLPDWHG UHVHUYH Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the embedded inflation rate and a one point change to the tail factor assumption would have changed total reserves by approximately $123 million, either positive or negative, at December 31, 2018. x Monoline and Multiple Peril General Liability ± loss reserves recorded for monoline and multiple peril general liability on U.S. voluntary business were $787.7 million as of December 31, 2018. A key assumption for monoline and multiple peril general liability is the implied adequacy of the underlying case reserves. A ten point change in case adequacy (e.g., 10% deficiency changed to 0% or 20% deficiency) would have changed total reserves by approximately $87 million, either positive or negative, at December 31, 2018. x Specialty Programs ± loss reserves recorded for the AIX program business were $339.6 million as of December 31, 2018. Two key assumptions underlying the actuarial reserve analysis for specialty programs are the inflation rate underlying the HVWLPDWHG UHVHUYH IRU RXU FRPPHUFLDO DXWRPRELOH OLDELOLW\ JHQHUDO OLDELOLW\ DQG ZRUNHUV¶ FRPSHQVDWLRQ FRYHUDJHV DV ZHOO as the tail factor selection for ZRUNHUV¶ FRPSHQVDWLRQ $ ILYH SRLQW FKDQJH WR WKH HPEHGGHG LQIODWLRQ UDWH IRU WKH DIRUHPHQWLRQHG FRYHUDJHV DQG D RQH SRLQW FKDQJH LQ WKH ZRUNHUV¶ FRPSHQVDWLRQ WDLO IDFWRU RQ $,; SURJUDP EXVLQHVV ZRXOG have changed total reserves by approximately $52 million at December 31, 2018. x Chaucer Catastrophe events ± the most significant events of 2018 were typhoons Jebi and Trami, the California wildfires, and hurricanes Michael and Florence. For these events, which represent 71% of the total 2018 accident year incurred catastrophe losses, a 25% increase in their estimated gross ultimate claims deterioration would have increased incurred catastrophe losses by approximately $6 million, net of reinsurance. For these events, a 25% decrease in their estimated gross 51 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP