Berkshire Hathaway 2003 Annual Report Download - page 65

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Management’s Discussion (Continued)
Critical Accounting Policies (Continued)
As of any balance sheet date, all claims that have occurred have not yet been reported to Berkshire, and if
reported may not have been settled. The time period between the occurrence of a loss and the time it is settled by the
insurer or reinsurer is referred to as the “claim-tail.” Property claims usually have a fairly short claim-tail and,
absent claim litigation, are reported and settled within no more than a few years of the balance sheet date. Casualty
losses, on the other hand, can have a very long claim-tail, occasionally extending for decades. In addition, casualty
claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and to
the legal environment, which contributes to the extended claim-tail. The claim-tail for reinsurers is further extended
due to delayed reporting by ceding insurers or reinsurers due to contractual provisions or reporting practices.
The process of establishing reserves for losses assumed under reinsurance contracts requires additional
estimation and judgments by management. Loss reserve estimates are based primarily on claims reported by ceding
companies (such amounts generally exclude IBNR claim estimates), analysis of historical claim reporting patterns
of ceding companies, and estimates of expected overall loss amounts. Techniques for estimating facultative (or
individual) reinsurance losses can be similar to those techniques used by primary insurers and subject to the same
caveats. In estimating losses assumed under treaty reinsurance (groups of losses), claim frequency or count
analyses may not be used because such data is either not provided by ceding companies or otherwise not timely or
reliable. Loss reserves established by line of business and type of coverage are regularly re-evaluated with
appropriate adjustments being made to bring reserves in line with the revised estimates.
IBNR reserves are largely comprised of casualty exposures, which include workers’ compensation losses.
These claims tend to be reported by and settled with ceding companies over long time periods. Therefore, such
claims are subject to a higher degree of estimation error as a result of changes in the legal environment, jury awards,
medical cost trends and general cost inflation. Based upon statistical analysis of past reporting trends, Berkshire
estimates how much IBNR is required to cover claims that will be reported by ceding companies in future years.
Subsequently, as claims are reported, amounts are measured against previous expectations, with variances (positive
or negative) recognized in earnings as a component of losses and loss adjustment expenses. Significant variances
between expected claims and reported claims are analyzed and considered when revising estimates for remaining
IBNR reserve levels.
Due to the inherent uncertainties in the processes and judgments used in establishing reserves, and because
expected losses are an input in establishing premium rates for new policies, Berkshire’ s management believes it is
appropriate to establish reserve levels using a reasonable level of caution, especially with respect to casualty claims.
Receivables recorded with respect to insurance losses ceded to other reinsurers under reinsurance contracts
are estimated in a manner similar to liabilities for insurance losses and, therefore, are also subject to estimation
error. In addition to the factors cited above, reinsurance recoverables may ultimately prove to be uncollectible if the
reinsurer is unable to perform under the contract. Reinsurance contracts do not relieve the ceding company of its
obligations to indemnify its own policyholders.
A summary of Berkshire’ s consolidated liabilities for unpaid property and casualty losses are in the table
below. The amount of losses recorded in each of the past two years relating to prior years’ loss occurrences is
expressed as a percentage of total net premiums earned as well as a percentage of the net reserve balance established
as of the beginning of the year. Dollars are in millions.
Unpaid losses Net unpaid losses*
Dec.31, 2003 Dec.31, 2002 Dec.31, 2003 Dec.31, 2002
General Re.................................................................. $23,820 $23,326 $20,787 $20,784
BHRG......................................................................... 15,769 15,516 12,513 11,990
GEICO........................................................................ 4,492 4,010 4,282 3,816
Berkshire Hathaway Primary ..................................... 1,312 919 1,217 834
Total ........................................................................... $45,393 $43,771 $38,799 $37,424
Losses incurred related to prior years......................... $ 480** $ 1,540**
Losses as a % of net reserves beginning of the year .. 1.3% 4.5%
Losses as a % of net premiums earned current year... 2.4% 8.9%
* Net of reinsurance recoverable and deferred charges reinsurance assumed.
** Includes amortization of deferred charges and includes accretion of discounts on General Re workers’ compensation
reserves (See Note 11 to the Consolidated Financial Statements).