Berkshire Hathaway 2007 Annual Report Download - page 67

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Management’s Discussion (Continued)
Property and casualty losses (Continued)
General Re (Continued)
reserves were approximately $1.9 billion gross and $1.2 billion net of reinsurance as of December 31, 2006. Claims paid
attributable to such losses were about $75 million in 2007. In 2007, IBNR reserve estimates for asbestos and environmental
claims were increased by $48 million. In addition to the previously described methodologies, General Re considers “survival
ratios” based on net claim payments in recent years versus net unpaid losses as a rough guide to reserve adequacy. The survival
ratio was approximately thirteen years as of December 31, 2007. The insurance industry’ s comparable survival ratio for asbestos
and pollution reserves was approximately eight years. Estimating mass tort losses is very difficult due to the changing legal
environment. Although such reserves are believed to be adequate, significant reserve increases may be required in the future if
new exposures or claimants are identified, new claims are reported or new theories of liability emerge.
BHRG
BHRG’ s unpaid losses and loss adjustment expenses as of December 31, 2007 are summarized as follows. Amounts
are in millions.
Property Casualty Total
Reported case reserves ...................................................... $ 1,654 $ 2,143 $ 3,797
IBNR reserves ................................................................... 1,180 2,660 3,840
Retroactive ........................................................................ — 17,257 17,257
Gross reserves ................................................................... $ 2,834 $22,060 24,894
Deferred charges and ceded reserves................................. (4,671)
Net reserves....................................................................... $20,223
In general, the methodologies used to establish loss reserves vary widely and encompass many of the common
methodologies employed in the actuarial field today. Certain traditional methodologies such as paid and incurred loss
development techniques, incurred and paid loss Bornhuetter-Ferguson techniques and frequency and severity techniques are
utilized as well as ground-up techniques where appropriate. Additional judgments must also be employed to consider changes in
contract conditions and terms as well as the incidence of litigation or legal and regulatory change.
As of December 31, 2007, BHRG’ s gross loss reserves related to retroactive reinsurance policies were predominantly
casualty losses. Retroactive policies include excess-of-loss contracts, in which losses (relating to loss events occurring before a
specified date on or before the contract date) above a contractual retention are indemnified or contracts that indemnify all losses
paid by the counterparty after the policy effective date. Retroactive losses paid in 2007 were $894 million. The classification
“reported case reserves” has no practical analytical value with respect to retroactive policies since the amount is often derived
from reports in bulk from ceding companies, who may have inconsistent definitions of “case reserves.” Reserves are reviewed
and established in the aggregate by contract including provisions for IBNR reserves.
In establishing retroactive reinsurance reserves, historical aggregate loss payment patterns are often analyzed and
projected into the future under various scenarios. The claim-tail is expected to be very long for many policies and may last
several decades. Management assigns judgmental probability factors to these aggregate loss payment scenarios and an
expectancy outcome is determined. Management monitors claim payment activity and reviews ceding company reports or other
information concerning the underlying losses. Since the claim-tail is expected to be very long for such contracts, management
reassesses expected ultimate losses as significant events related to the underlying losses are reported or revealed during the
monitoring and review process. During 2007, retroactive reserves developed downward by approximately $37 million.
BHRG’ s liabilities for environmental, asbestos, and latent injury losses and loss adjustment expenses are presently
concentrated within retroactive reinsurance contracts. Reserves for such losses were approximately $9.7 billion at December 31,
2007 and $3.8 billion at December 31, 2006. The increase during 2007 was due to the Equitas reinsurance agreement which
became effective on March 30, 2007. See Note 11 to the accompanying Consolidated Financial Statements. Losses paid in 2007
attributable to these exposures were approximately $500 million. BHRG, as a reinsurer, does not regularly receive reliable
information regarding numbers of asbestos, environmental and latent injury claims from all ceding companies on a consistent
basis, particularly with respect to multi-line treaty or aggregate excess of loss policies. Periodically, a ground-up analysis of the
underlying loss data of the reinsured is conducted to make an estimate of ultimate reinsured losses. When detailed loss
information is unavailable, estimates can only be developed by applying recent industry trends and projections to aggregate
client data. Judgments in these areas necessarily include the stability of the legal and regulatory environment under which these
claims will be adjudicated. Potential legal reform and legislation could also have a significant impact on establishing loss
reserves for mass tort claims in the future.
The maximum losses payable by BHRG under retroactive policies are not expected to exceed approximately $24.8
billion as of December 31, 2007. Absent significant judicial or legislative changes affecting asbestos, environmental or latent
injury exposures, management currently believes it unlikely that unpaid losses as of December 31, 2007 ($17.3 billion) will
develop upward to the maximum loss payable or downward by more than 15%.
A significant number of recent reinsurance contracts are expected to have a low frequency of claim occurrence combined
with a potential for high severity of claims. These include property losses from catastrophes, terrorism and aviation risks under
catastrophe and individual risk contracts. Loss reserves related to catastrophe and individual risk contracts decreased from
approximately $2.2 billion at year end 2006 to approximately $1.3 billion at year end 2007. The decrease in reserves reflected
loss payments in 2007 of approximately $900 million that were primarily attributable to the major hurricanes that occurred in