Berkshire Hathaway 2008 Annual Report Download - page 83

Management’s Discussion (Continued)
Property and casualty losses (Continued)
General Re and BHRG (Continued)
Premium and loss data is provided through at least one intermediary (the primary insurer), so there is a risk that the loss
data provided is incomplete, inaccurate or outside the coverage terms. Information provided by ceding companies is reviewed
for completeness and compliance with the contract terms. Reinsurance contracts generally allow for Berkshire’s reinsurance
subsidiaries to have access to the cedant’s books and records with respect to the subject business and provide them the ability to
conduct audits to determine the accuracy and completeness of information. Audits are conducted when management deems it
appropriate.
In the normal course of business, disputes with clients arise concerning whether certain claims are covered under the
reinsurance policies. Most coverage disputes are resolved by the company’s claims department personnel and the appropriate
client personnel or by independent outside counsel. If disputes cannot be resolved, contracts generally specify whether
arbitration, litigation, or alternative dispute resolution will be invoked. There are no coverage disputes at this time for which an
adverse resolution would likely have a material impact on Berkshire’s results of operations or financial condition.
In summary, the scope, number and potential variability of assumptions required in estimating ultimate losses from
reinsurance contracts of General Re and BHRG are more uncertain than primary property and casualty insurers due to the
factors previously discussed.
General Re
General Re’s gross and net unpaid losses and loss adjustment expenses and gross reserves by major line of business as of
December 31, 2008 are summarized below. Amounts are in millions.
Type Line of business
Reported case reserves ........................ $ 9,959 Workers’ compensation (1) ................... $ 3,108
IBNR reserves ............................... 8,282 Professional liability (2) ...................... 1,450
Gross reserves ............................... 18,241 Mass tort–asbestos/environmental ............. 1,810
Ceded reserves and deferred charges ............. (1,006) Auto liability .............................. 2,871
Net reserves ................................. $17,235 Other casualty (3) ........................... 3,399
Other general liability ....................... 2,908
Property .................................. 2,695
Total .................................... $18,241
(1) Net of discounts of $2,616 million.
(2) Includes directors and officers and errors and omissions coverage.
(3) Includes medical malpractice and umbrella coverage.
General Re’s process of establishing loss reserve estimates is based upon a ground-up approach, beginning with case estimates
and supplemented by additional case reserves (“ACRs”) and IBNR reserves. Critical judgments in establishing loss reserves
involve the establishment of ACRs by claim examiners, the expectation of ultimate loss ratios which drive IBNR reserve amounts
and the case reserve reporting trends compared to the expected loss reporting patterns. Recorded reserve amounts are subject to
“tail risk” where reported losses develop beyond the maximum expected loss emergence pattern time period.
General Re does not routinely determine loss reserve ranges because it believes that the techniques necessary have not
sufficiently developed and the myriad of assumptions required render such resulting ranges to be unreliable. In addition, counts of
claims or average amounts per claim are not utilized because clients do not consistently provide reliable data in sufficient detail.
Upon notification of a reinsurance claim from a ceding company, claim examiners make independent evaluations of loss
amounts. In some cases, examiners’ estimates differ from amounts reported by ceding companies. If the examiners’ estimates
are significantly greater than the ceding company’s estimates, the claims are further investigated. If deemed appropriate, ACRs
are established above the amount reported by the ceding company. As of December 31, 2008, ACRs aggregated $3.1 billion
before discounts and were concentrated in workers’ compensation reserves, and to a lesser extent in professional liability
reserves. Examiners also periodically conduct detailed claim reviews of individual clients and case reserves are often increased
as a result. In 2008, claim examiners conducted about 340 claim reviews.
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