10. Property and Casualty Insurance Activity

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

10. Property and Casualty Insurance Activity

Premiums written, ceded and earned are as follows:

	Direct			Assumed			Ceded			Net
Year ended December 31, 2013
Premiums written	$	60,449,077		$	45,746		$	(35,656,060	)	$	24,838,763
Change in unearned premiums		(6,341,750	)		18,499			3,709,655			(2,613,596	)
Premiums earned	$	54,107,327		$	64,245		$	(31,946,405	)	$	22,225,167
Year ended December 31, 2012
Premiums written	$	49,251,630		$	23,967		$	(29,715,971	)	$	19,559,626
Change in unearned premiums		(4,724,193	)		(5,010	)		2,386,188			(2,343,015	)
Premiums earned	$	44,527,437		$	18,957		$	(27,329,783	)	$	17,216,611

Premium receipts in advance of the policy effective date are recorded as advance premiums. The balance of advance premiums as of December 31, 2013 and 2012 was approximately $776,000 and $611,000, respectively.

The components of the liability for loss and LAE expenses and related reinsurance receivables as of December 31, 2013 and 2012 are as follows:

	Gross		Reinsurance
	Liability		Receivables
December 31, 2013
Case-basis reserves	$	22,489,240	$	12,078,399
Loss adjustment expenses		4,200,675		1,226,763
IBNR reserves		7,813,314		4,058,813
Recoverable on unpaid losses				17,363,975
Recoverable on paid losses		-		1,796,512
Total loss and loss adjustment expenses	$	34,503,229		19,160,487
Unearned premiums				18,400,338
Total reinsurance receivables			$	37,560,825
December 31, 2012
Case-basis reserves	$	21,190,141	$	13,284,613
Loss adjustment expenses		2,502,169		1,064,420
IBNR reserves		6,793,222		4,070,661
Recoverable on unpaid losses				18,419,694
Recoverable on paid losses		-		5,792,405
Total loss and loss adjustment expenses	$	30,485,532		24,212,099
Unearned premiums				14,690,683
Total reinsurance receivables			$	38,902,782

The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss adjustment expenses (“LAE”):

	Years ended
	December 31,
	2013			2012
Balance at beginning of period	$	30,485,532		$	18,480,717
Less reinsurance recoverables		(18,419,694	)		(9,960,334	)
Net balance, beginning of period		12,065,838			8,520,383
Incurred related to:
Current year		11,765,420			10,460,000
Prior years		1,821,113			774,713
Total incurred		13,586,533			11,234,713
Paid related to:
Current year		3,709,495			4,419,000
Prior years		4,803,622			3,270,258
Total paid		8,513,117			7,689,258
Net balance at end of period		17,139,254			12,065,838
Add reinsurance recoverables		17,363,975			18,419,694
Balance at end of period	$	34,503,229		$	30,485,532

Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $17,167,407 and $21,396,768 for the years ended December 31, 2013 and 2012, respectively.

Prior year incurred loss and LAE development is based upon numerous estimates by line of business and accident year. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and IBNR reserves, giving consideration to Company and industry trends.

Loss and loss adjustment expense reserves

The reserving process for loss adjustment expense reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and loss adjustment expenses incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet been reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the possible changes in the law and other external factors that are often 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 result of numerous best estimates made by line of business, accident year, and loss and loss adjustment expense. The amount of loss and loss adjustment expense reserves for reported claims (“case reserve”) is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and loss adjustment expense reserves for unreported claims and development on known claims (incurred but not reported reserves) are determined using historical information 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 year’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 years. Several methods are used, varying by product line and accident year, in order to select the estimated year-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.

Management’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the various 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 impact 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 claims trends that have emerged or that would cause future adverse development that have not already been considered in existing case reserves and in its current loss development factors.

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 ‘pure’ IBNR for accident years 2010 and prior is limited although there remains the possibility of adverse development on reported claims (‘case development’ IBNR).

The Company was previously a one-third participant in a pool arrangement. Effective November 1, 1997, the Company withdrew from its participation in the pool arrangement. Accordingly, the Company will only be participating in losses and allocated loss adjustment expenses that occurred prior to that date.