| Unpaid losses and loss adjustment expenses | (14) Unpaid losses and loss
adjustment expenses
The liabilities
for unpaid losses and loss adjustment expenses (also referred to as
“claim liabilities”) under our short duration property
and casualty insurance and reinsurance contracts are based upon
estimates of the ultimate claim costs associated with claim
occurrences as of the balance sheet date and include estimates for
incurred-but-not-reported
2016 2015 2014
Unpaid losses and loss
adjustment expenses—beginning of year:
Gross
liabilities $ 73,144 $ 71,477 $ 64,866
Reinsurance recoverable and
deferred charges (10,994 ) (10,888 ) (7,414 )
Net balance 62,150 60,589 57,452
Incurred losses and loss
adjustment expenses recorded during the year:
Current accident year
events 30,636 27,829 24,335
Prior accident years’
events (1,512 ) (2,014 ) (2,280 )
Retroactive reinsurance and
discount accretion 1,782 712 4,351
Total incurred losses and
loss adjustment expenses 30,906 26,527 26,406
Paid losses and loss
adjustment expenses during the year with respect to:
Current accident year
events (14,898 ) (13,070 ) (11,291 )
Prior accident years’
events (10,958 ) (10,268 ) (10,297 )
Retroactive
reinsurance (1,130 ) (1,151 ) (1,082 )
Total payments (26,986 ) (24,489 ) (22,670 )
Foreign currency
translation adjustment (537 ) (545 ) (666 )
Business
acquisitions — 68 67
Unpaid losses and loss
adjustment expenses—end of year:
Net balance 65,533 62,150 60,589
Reinsurance recoverable and
deferred charges 11,385 10,994 10,888
Gross
liabilities $ 76,918 $ 73,144 $ 71,477
Incurred losses
and loss adjustment expenses in the preceding table reflect the
losses and loss adjustment expenses recorded in earnings in each
year related to insured events occurring in the current year and in
prior years. We present incurred and paid losses under retroactive
reinsurance contracts and discount accretion separately. Such
amounts relate to prior years’ underlying loss events.
Additionally, we discount unpaid losses from certain workers’
compensation reinsurance contracts. Discounted workers’
compensation liabilities at December 31, 2016 and 2015 were
approximately $1.9 billion and $2.0 billion,
respectively, reflecting net discounts of $1.4 billion and
$1.6 billion.
Incurred losses
and loss adjustment expenses reflected reductions for prior
years’ insured events of approximately $1.5 billion in
2016, $2.0 billion in 2015 and $2.3 billion in 2014. In
each year, these reductions derived from our direct insurance
business (including private passenger automobile and medical
malpractice and workers’ compensation coverages), as well as
from reinsurance business. The reductions for our reinsurance
business were primarily attributable to lower than expected
reported losses from ceding companies with respect to property
coverages.
Estimated claim
liabilities for environmental, asbestos and other latent injury
exposures, net of reinsurance recoverables, were approximately
$15.3 billion at December 31, 2016 and $14.0 billion
at December 31, 2015, and included approximately
$13.7 billion at December 31, 2016 and $12.4 billion
at December 31, 2015 from retroactive reinsurance contracts.
Retroactive reinsurance contracts are generally subject to
aggregate policy limits and thus, our exposure to such claims under
these contracts is likewise limited. We monitor evolving case law
and its effect on environmental and other latent injury claims.
Changing government regulations, newly identified toxins, newly
reported claims, new theories of liability, new contract
interpretations and other factors could result in increases in
these liabilities. Such development could be material to our
results of operations. We are unable to reliably estimate the
amount of additional net loss or the range of net loss that is
reasonably possible.
A
reconciliation of certain net unpaid losses and allocated loss
adjustment expenses (the latter referred to as “ALAE”)
of GEICO, General Re, Berkshire Hathaway Reinsurance Group
(“BHRG”) and Berkshire Hathaway Primary Group
(“BH Primary”) to our consolidated unpaid losses and
loss adjustment expenses as of December 31, 2016, along with a
discussion regarding each group’s liability estimation
processes, follows.
December 31, 2016
(in millions)
Unpaid losses and ALAE, net
of reinsurance recoverable:
GEICO $ 12,981
General Re 13,973
BHRG 10,172
BH Primary 10,173 $ 47,299
Reinsurance
recoverable:
GEICO 1,084
General Re 611
BHRG 121
BH Primary 1,099 2,915
Retroactive reinsurance,
unpaid losses and loss adjustment expenses 24,675
Other short-duration
contracts, unpaid losses and loss adjustment expenses 1,390
Discount on workers’
compensation reinsurance liabilities (1,433 )
Unpaid unallocated loss
adjustment expenses 2,072
Unpaid losses and loss
adjustment expenses $ 76,918
GEICO
For GEICO, we
establish and evaluate unpaid claim liabilities using standard
actuarial loss development methods and techniques. The actuarial
methods utilize historical claims data, adjusted when deemed
appropriate to reflect perceived changes in loss
patterns.
We establish
average liabilities based on expected severities for newly reported
physical damage and liability claims prior to establishing an
individual case reserve when we have insufficient time and
information to make specific claim estimates and for a large number
of minor physical damage claims that are paid shortly after being
reported. We establish liability case loss estimates, which
includes loss adjustment expenses, once the facts and merits of the
claim are evaluated.
Estimates for
liability coverages are more uncertain primarily due to the longer
claim-tails, the greater chance of protracted litigation and the
incompleteness of facts at the time the case estimate is first
established. The “claim-tail” is the time period
between the claim occurrence date and settlement date. As a result,
we establish additional case development liabilities, which are
usually percentages of the case liabilities. For unreported claims,
IBNR liabilities are estimated by projecting the ultimate number of
claims expected (reported and unreported) for each significant
coverage and deducting reported claims to produce estimated
unreported claims. The product of the average cost per unreported
claim and the number of unreported claims produces the IBNR
liability estimate. We may record supplemental IBNR liabilities in
certain situations when actuarial techniques are difficult to
apply.
GEICO’s
claims are counted when accidents that may result in a liability
are reported and are based on policy coverage. Each claim event may
generate claims under multiple coverages, and thus may result in
multiple counts. The “Cumulative Number of Reported
Claims” in the table which follows includes the combined
number of reported claims for all policy coverages and excludes
projected IBNR claims.
GEICO’s
claim liabilities predominantly relate to various types of private
passenger auto liability and physical damage claims. Aggregate
incurred and paid loss and ALAE data by accident year for these
claims, net of reinsurance, follows. IBNR and case development
liabilities are as of December 31, 2016. Dollars are in
millions.
Accident
Year Incurred Losses and ALAE
through December 31, IBNR and Case Liabilities Cumulative (in
thousands)
2012* 2013* 2014* 2015* 2016
2012 $ 12,034 $ 11,904 $ 11,893 $ 11,906 $ 11,900 $ 79 6,459
2013 12,990 12,815 12,859 12,837 184 7,102
2014 14,597 14,488 14,477 539 7,965
2015 16,807 16,798 1,394 8,891
2016 18,982 3,132 9,336
Incurred losses and
ALAE $ 74,994
Accident
Year Cumulative Paid Losses and ALAE through December 31,
2012* 2013* 2014* 2015* 2016
2012 $ 7,550 $ 9,832 $ 10,744 $ 11,311 $ 11,609
2013 7,944 10,494 11,569 12,174
2014 9,133 11,956 13,060
2015 10,543 13,785
2016 11,927
Paid losses and
ALAE 62,555
Net unpaid losses and ALAE
for 2012—2016 accident years 12,439
Net unpaid losses and ALAE
for accident years before 2012* 542
Net unpaid losses and
ALAE $ 12,981
* Unaudited supplemental
information General
Re
General
Re’s liabilities for unpaid losses and loss adjustment
expenses include case and IBNR estimates and primarily relate to
casualty and workers’ compensation coverages. Case losses are
reported under reinsurance contracts either individually or in bulk
as provided under the terms of the contracts. We independently
evaluate reported loss amounts and if deemed appropriate, we
establish case liabilities based on our estimates.
We primarily
use Bornhuetter—Ferguson methods to estimate IBNR amounts for
claims liabilities. The expected case loss emergence patterns and
expected loss ratios are the critical assumptions applicable to
these estimates. Once the annual IBNR liabilities are determined,
we estimate the expected case loss emergence for the next calendar
year based on the prior year-end per-policy
General
Re’s incurred and paid loss and ALAE data by accident year,
net of reinsurance, is presented in the following tables. IBNR and
case development liabilities are as of December 31, 2016.
Dollars are in millions.
Accident Year Incurred Losses and ALAE
through December 31, IBNR and Case Liabilities
2007* 2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015* 2016
2007 $ 1,857 $ 1,915 $ 1,852 $ 1,746 $ 1,673 $ 1,619 $ 1,574 $ 1,559 $ 1,535 $ 1,512 $ 73
2008 1,920 2,011 1,903 1,818 1,746 1,713 1,669 1,648 1,635 93
2009 1,703 1,790 1,704 1,601 1,523 1,490 1,471 1,431 125
2010 1,881 2,055 1,939 1,845 1,757 1,712 1,674 156
2011 2,102 2,126 1,897 1,792 1,744 1,669 208
2012 1,810 1,850 1,707 1,603 1,535 335
2013 1,945 2,095 1,994 1,854 417
2014 1,740 1,843 1,794 578
2015 1,811 1,999 777
2016 1,715 1,173
Incurred losses and
ALAE $ 16,818
Accident
Year Cumulative Paid Losses
and ALAE through December 31,
2007* 2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015* 2016
2007 $ 282 $ 821 $ 1,020 $ 1,132 $ 1,195 $ 1,238 $ 1,291 $ 1,309 $ 1,322 $ 1,335
2008 330 894 1,074 1,187 1,246 1,289 1,315 1,330 1,354
2009 264 734 897 994 1,065 1,115 1,145 1,161
2010 247 782 997 1,147 1,243 1,304 1,359
2011 302 841 1,086 1,190 1,259 1,317
2012 199 664 829 916 991
2013 275 829 1,060 1,162
2014 171 666 864
2015 207 693
2016 171
Paid losses and
ALAE 10,407
Net unpaid losses and ALAE
for 2007—2016 accident years 6,411
Net unpaid losses and ALAE
for accident years before 2007* 7,562
Net unpaid losses and
ALAE $ 13,973
* Unaudited supplemental
information BHRG
BHRG’s
liabilities for losses and ALAE are principally a function of
reported losses from ceding companies and IBNR and case development
liability estimates which are based on expected loss ratios
established on a portfolio basis. Liability estimates also include
estimates of the impact of major catastrophe events, as they become
known, which rely more on a per-policy
BHRG’s
incurred and paid loss and ALAE data by accident year, net of
reinsurance, is presented in the following tables. IBNR and case
development liabilities are as of December 31, 2016. Dollars
are in millions.
Accident
Year Incurred Losses and ALAE
through December 31,** IBNR and Case Liabilities
2007* 2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015* 2016
2007 $ 1,810 $ 1,756 $ 1,659 $ 1,658 $ 1,652 $ 1,590 $ 1,583 $ 1,560 $ 1,500 $ 1,471 $ 133
2008 3,388 3,130 2,988 2,903 2,835 2,748 2,683 2,605 2,578 244
2009 2,974 2,858 2,989 2,926 2,847 2,759 2,691 2,668 215
2010 2,876 2,974 2,883 2,771 2,610 2,575 2,551 238
2011 4,418 4,544 4,358 4,440 4,389 4,365 452
2012 4,054 3,878 3,648 3,583 3,531 694
2013 3,326 3,144 2,935 2,832 733
2014 2,688 2,585 2,492 736
2015 3,207 3,070 1,113
2016 3,390 1,907
Incurred losses and
ALAE $ 28,948
Accident
Year Cumulative Paid Losses
and ALAE through December 31,**
2007* 2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015* 2016
2007 $ 171 $ 677 $ 891 $ 993 $ 1,055 $ 1,120 $ 1,170 $ 1,196 $ 1,211 $ 1,221
2008 364 1,146 1,617 1,836 1,976 2,056 2,131 2,205 2,228
2009 372 1,182 1,605 1,937 2,147 2,306 2,336 2,363
2010 193 889 1,414 1,736 2,041 2,119 2,177
2011 552 2,130 2,872 3,315 3,475 3,600
2012 360 1,279 2,080 2,350 2,519
2013 516 1,070 1,555 1,774
2014 437 1,031 1,319
2015 550 1,354
2016 778
Paid losses and
ALAE 19,333
Net unpaid losses and ALAE
for 2007—2016 accident years 9,615
Net unpaid losses and ALAE
for accident years before 2007* 557
Net unpaid losses and
ALAE $ 10,172
* Unaudited supplemental
information
** Excludes retroactive
reinsurance losses and ALAE BH
Primary
BH
Primary’s liabilities for unpaid losses and ALAE primarily
derive from workers’ compensation, medical professional and
other liability insurance. Other liability insurance includes
commercial auto and general liability policies. We periodically
evaluate ultimate unpaid loss and ALAE estimates for the
workers’ compensation and general liability lines using a
combination of commonly accepted actuarial methodologies, such as
the Bornhuetter—Ferguson and chain-ladder approaches using
paid and incurred loss data. Paid and incurred loss data is
segregated into groups such as coverages, territories or other
characteristics. We establish case liabilities for reported claims
based upon the facts and circumstances of the claim. The excess of
the ultimate projected losses, including the expected development
of case estimates, and the case-basis liabilities is included in
IBNR liabilities. For medical professional liabilities, we use a
combination of the aforementioned methods, as well as other loss
severity based methods. From these estimates, we determine our best
estimate. Periodically, we study developments in older accident
years and adjust initial loss estimates to reflect recent
development based upon claim age, coverage and litigation
experience. The cumulative number of reported claims reflects the
number of individual claimants, and includes claim that ultimately
result in no liability or payment.
BH
Primary’s incurred and paid loss and ALAE data by accident
year, net of reinsurance, is presented in the following tables.
IBNR and case development liabilities are as of December 31,
2016. Dollars are in millions.
Accident
Year Incurred Losses and ALAE
through December 31, IBNR and Liabilities Cumulative (in thousands)
2007* 2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015* 2016
2007 $ 1,328 $ 1,233 $ 1,174 $ 1,090 $ 955 $ 901 $ 852 $ 817 $ 788 $ 775 $ 46 137
2008 1,349 1,273 1,228 1,168 1,081 1,015 979 948 920 80 136
2009 1,298 1,211 1,180 1,159 1,068 1,020 966 936 99 117
2010 1,268 1,186 1,191 1,129 1,062 994 956 150 111
2011 1,888 1,633 1,605 1,452 1,375 1,297 223 109
2012 2,129 2,079 2,017 1,944 1,903 453 135
2013 2,294 2,213 2,133 2,060 595 150
2014 2,967 2,780 2,730 1,027 177
2015 3,575 3,458 1,631 188
2016 4,149 2,682 135
Incurred losses and
ALAE $ 19,184
Accident
Year Cumulative Paid Losses
and ALAE through December 31,
2007* 2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015* 2016
2007 $ 128 $ 284 $ 409 $ 510 $ 578 $ 628 $ 660 $ 679 $ 696 $ 705
2008 174 333 464 578 662 728 772 795 810
2009 147 305 445 569 655 726 771 798
2010 146 313 458 570 657 722 758
2011 163 396 602 753 898 973
2012 211 598 844 1,053 1,208
2013 350 706 985 1,197
2014 453 896 1,247
2015 502 1,078
2016 634
Paid losses and
ALAE 9,408
Net unpaid losses and ALAE
for 2007—2016 accident years 9,776
Net unpaid
losses and ALAE for accident years before 2007* 397
Net unpaid losses and
ALAE $ 10,173
* Unaudited supplemental
information
Supplemental
unaudited average historical claims duration information based on
the net losses and ALAE incurred and paid accident year data in the
preceding tables follows. The percentages show the average portions
of net losses and ALAE paid by each succeeding year, with year 1
representing the current accident year.
Average Annual Percentage Payout of Incurred Losses by Age,
Net of Reinsurance
In
Years 1 2 3 4 5 6 7 8 9 10
GEICO 62.2 % 19.6 % 8.0 % 4.8 % 2.7 %
Gen Re 14.8 % 31.0 % 12.2 % 6.8 % 4.6 % 3.2 % 2.6 % 1.1 % 1.2 % 0.9 %
BHRG 14.7 % 28.2 % 17.2 % 9.4 % 6.3 % 3.9 % 2.4 % 1.9 % 1.0 % 0.7 %
BH Primary 15.4 % 17.8 % 14.5 % 11.9 % 9.2 % 6.8 % 4.3 % 2.6 % 1.9 % 1.2 % Retroactive
Reinsurance
BHRG’s
retroactive reinsurance contracts cover underlying loss events that
occurred prior to the contract inception date, which are paid
immediately after the contract date or once a contractual retention
amount has been reached. As of December 31, 2016 approximately
83% of gross unpaid losses pertained to underlying loss events that
occurred prior to January 2007. We do not believe that analysis of
losses incurred and paid by accident year of the underlying event
is relevant or meaningful given that our exposure to losses incepts
when the contract incepts. Further, we believe the classifications
of reported claims and case development liabilities has no
practical analytical value.
In establishing
retroactive reinsurance liabilities, we often analyze historical
aggregate loss payment patterns and project losses into the future
under various scenarios. We expect the claim-tail to be very long
for many contracts, with some lasting several decades. We assign
judgmental probability factors to these aggregate loss payment
scenarios and an expectancy outcome is determined. We monitor claim
payment activity and review ceding company reports and other
information concerning the underlying losses. Since the expected
claim-tails are often very long, we reassess and revise the
expected timing and amounts of ultimate losses periodically or when
significant events are revealed through our monitoring and review
processes.
Incurred losses
and loss adjustment expenses attributable to retroactive
reinsurance contracts included $1.26 billion in 2016 and
$3.43 billion in 2014 from new contracts written in those
years. Incurred losses related to retroactive reinsurance contracts
written in prior years were $440 million in 2016,
$631 million in 2015 and $831 million in 2014, which
included recurring amortization of deferred charges and the effect
of changes in the timing and amount of expected future loss
payments. |
