Allstate 2011 Annual Report Download - page 103

Reserves for catastrophe losses Property-Liability claims and claims expense reserves also include reserves for
catastrophe losses. Catastrophe losses are an inherent risk of the property-liability insurance industry that have
contributed, and will continue to contribute, to potentially material year-to-year fluctuations in our results of operations
and financial position. We define a ‘‘catastrophe’’ as an event that produces pre-tax losses before reinsurance in excess
of $1 million and involves multiple first party policyholders, or an event that produces a number of claims in excess of a
preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the
event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms,
wildfires, tropical storms, hurricanes, earthquakes and volcanoes. We are also exposed to man-made catastrophic
events, such as certain acts of terrorism or industrial accidents. The nature and level of catastrophes in any period
cannot be predicted.
The estimation of claims and claims expense reserves for catastrophes also comprises estimates of losses from
reported claims and IBNR, primarily for damage to property. In general, our estimates for catastrophe reserves are
based on claim adjuster inspections and the application of historical loss development factors as described previously.
However, depending on the nature of the catastrophe, as noted above, the estimation process can be further
complicated. For example, for hurricanes, complications could include the inability of insureds to promptly report losses,
limitations placed on claims adjusting staff affecting their ability to inspect losses, determining whether losses are
covered by our homeowners policy (generally for damage caused by wind or wind driven rain) or specifically excluded
coverage caused by flood, estimating additional living expenses, and assessing the impact of demand surge, exposure
to mold damage, and the effects of numerous other considerations, including the timing of a catastrophe in relation to
other events, such as at or near the end of a financial reporting period, which can affect the availability of information
needed to estimate reserves for that reporting period. In these situations, we may need to adapt our practices to
accommodate these circumstances in order to determine a best estimate of our losses from a catastrophe. As an
example, in 2005 to complete an estimate for certain areas affected by Hurricane Katrina and not yet inspected by our
claims adjusting staff, or where we believed our historical loss development factors were not predictive, we relied on
analysis of actual claim notices received compared to total PIF, as well as visual, governmental and third party
information, including aerial photos, area observations, and data on wind speed and flood depth to the extent available.
Potential reserve estimate variability The aggregation of numerous micro-level estimates for each business
segment, line of insurance, major components of losses (such as coverages and perils), and major states or groups of
states for reported losses and IBNR forms the reserve liability recorded in the Consolidated Statements of Financial
Position. Because of this detailed approach to developing our reserve estimates, there is not a single set of assumptions
that determine our reserve estimates at the consolidated level. Given the numerous micro-level estimates for reported
losses and IBNR, management does not believe the processes that we follow will produce a statistically credible or
reliable actuarial reserve range that would be meaningful. Reserve estimates, by their very nature, are very complex to
determine and subject to significant judgment, and do not represent an exact determination for each outstanding claim.
Accordingly, as actual claims, and/or paid losses, and/or case reserve results emerge, our estimate of the ultimate cost
to settle will be different than previously estimated.
To develop a statistical indication of potential reserve variability within reasonably likely possible outcomes, an
actuarial technique (stochastic modeling) is applied to the countrywide consolidated data elements for paid losses and
paid losses combined with case reserves separately for injury losses, auto physical damage losses, and homeowners
losses excluding catastrophe losses. Based on the combined historical variability of the development factors calculated
for these data elements, an estimate of the standard error or standard deviation around these reserve estimates is
calculated within each accident year for the last eleven years for each type of loss. The variability of these reserve
estimates within one standard deviation of the mean (a measure of frequency of dispersion often viewed to be an
acceptable level of accuracy) is believed by management to represent a reasonable and statistically probable measure
of potential variability. Based on our products and coverages, historical experience, the statistical credibility of our
extensive data and stochastic modeling of actuarial chain ladder methodologies used to develop reserve estimates, we
estimate that the potential variability of our Allstate Protection reserves, excluding reserves for catastrophe losses,
within a reasonable probability of other possible outcomes, may be approximately plus or minus 4%, or plus or minus
$425 million in net income. A lower level of variability exists for auto injury losses, which comprise approximately 75% of
reserves, due to their relatively stable development patterns over a longer duration of time required to settle claims.
Other types of losses, such as auto physical damage, homeowners losses and other losses, which comprise about 25%
of reserves, tend to have greater variability but are settled in a much shorter period of time. Although this evaluation
reflects most reasonably likely outcomes, it is possible the final outcome may fall below or above these amounts.
Historical variability of reserve estimates is reported in the Property-Liability Claims and Claims Expense Reserves
section of this document.
23
MD&A