Berkshire Hathaway 2009 Annual Report Download - page 80

Management’s Discussion (Continued)
Property and casualty losses (Continued)
As of any balance sheet date, not all claims that have occurred have been reported and not all reported claims have been
settled. Loss and loss adjustment expense reserves include provisions for reported claims (referred to as “case reserves”) and for
claims that have not been reported (referred to as incurred but not yet reported (“IBNR”) reserves). The time period between the
loss occurrence date and settlement payment date is referred to as the “claim-tail.” Property claims usually have fairly short
claim-tails and, absent litigation, are reported and settled within a few years of occurrence. Casualty losses usually have very
long claim-tails, occasionally extending for decades. Casualty claims are more susceptible to litigation and can be significantly
affected by changing contract interpretations. The legal environment further contributes to extending claim-tails.
Receivables are recorded with respect to losses ceded to other reinsurers and are estimated in a manner similar to liabilities
for insurance losses. 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.
We utilize loss reserving techniques that are believed to best fit the particular business. Additional information regarding
reserving processes of our significant insurance businesses (GEICO, General Re and BHRG) follows.
GEICO
GEICO’s gross unpaid losses and loss adjustment expense reserves as of December 31, 2009 were $8,561 million. As of
December 31, 2009, gross reserves included $6,187 million of reported average, case and case development reserves and $2,374
million of IBNR reserves. GEICO predominantly writes private passenger auto insurance which has a relatively short claim-tail.
The key assumptions affecting the setting of our reserves include projections of ultimate claim counts (“frequency”) and
average loss per claim (“severity”), which includes loss adjustment expenses.
Our reserving methodologies produce reserve estimates based upon the individual claims (or a “ground-up” approach),
which yields an aggregate estimate of the ultimate losses and loss adjustment expenses. Ranges of loss estimates are not
determined in the aggregate.
Our actuaries establish and evaluate unpaid loss reserves using recognized standard actuarial loss development methods
and techniques. The significant reserve components (and percentage of gross reserves) are: (1) average reserves (20%), (2) case
and case development reserves (55%) and (3) IBNR reserves (25%). Each component of loss reserves is affected by the
expected frequency and average severity of claims. Such amounts are analyzed using statistical techniques on historical claims
data and adjusted when appropriate to reflect perceived changes in loss patterns. Data is analyzed by policy coverage, rated
state, reporting date and occurrence date, among other factors. A brief discussion of each reserve component follows.
We establish average reserve amounts for reported auto damage claims and new liability claims prior to the development of
an individual case reserve. The average reserves are established as a reasonable estimate for incurred claims for which our
claims adjusters have insufficient time and information to make specific claim estimates and for a large number of minor
physical damage claims that are paid within a relatively short time after being reported. Average reserve amounts are driven by
the estimated average severity per claim and the number of new claims opened.
Our claims adjusters generally establish individual liability claim case loss and loss adjustment expense reserve estimates
as soon as the specific facts and merits of each claim can be evaluated. Case reserves represent the amounts that in the judgment
of the adjusters are reasonably expected to be paid in the future to completely settle the claim, including expenses. Individual
case reserves are revised as more information becomes known.
For most liability coverages, case reserves alone are an insufficient measure of the ultimate cost due in part to the longer
claim-tail, the greater chance of protracted litigation and the incompleteness of facts available at the time the case reserve is
established. Therefore, we establish additional case development reserve estimates, which are usually percentages of the case
reserve. As of December 31, 2009, case development reserves averaged approximately 20% of total established case reserves. In
general, case development factors are selected by a retrospective analysis of the overall adequacy of historical case reserves.
Case development factors are reviewed and revised periodically.
For unreported claims, IBNR reserve estimates are calculated by first projecting the ultimate number of claims expected
(reported and unreported) for each significant coverage by using historical quarterly and monthly claim counts to develop
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