Berkshire Hathaway 2010 Annual Report Download - page 88

Management’s Discussion (Continued)
Property and casualty losses (Continued)
GEICO (Continued)
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 intended to represent 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, 2010, case development reserves averaged approximately 25% 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
age-to-age projections of the ultimate counts by accident quarter. Reported claims are subtracted from the ultimate claim
projections to produce an estimate of the number of unreported claims. The number of unreported claims is multiplied by an
estimate of the average cost per unreported claim to produce the IBNR reserve amount. Actuarial techniques are difficult to
apply reliably in certain situations, such as to new legal precedents, class action suits or recent catastrophes. Consequently,
supplemental IBNR reserves for these types of events may be established through the collaborative effort of actuarial, claims
and other management.
For each significant coverage, we test the adequacy of the total loss reserves using one or more actuarial projections based
on claim closure models, paid loss triangles and incurred loss triangles. Each type of projection analyzes loss occurrence data
for claims occurring in a given period and projects the ultimate cost.
Loss reserve estimates recorded at the end of 2009 developed downward by $507 million when reevaluated through
December 31, 2010, producing a corresponding increase to pre-tax earnings in 2010. These downward reserve developments
represented approximately 3.6% of earned premiums in 2010 and approximately 5.9% of the prior year-end reserve amount.
Reserving assumptions at December 31, 2010 were modified appropriately to reflect the most recent frequency and severity
results. Future reserve development will depend on whether actual frequency and severity are more or less than anticipated.
Within the automobile line of business, reserves for liability coverages are more uncertain due to the longer claim-tails.
Approximately 90% of GEICO’s reserves as of December 31, 2010 were for automobile liability, of which bodily injury (“BI”)
coverage accounted for approximately 55%. We believe it is reasonably possible that the average BI severity will change by at
least one percentage point from the severity used. If actual BI severity changes one percentage point from what was used in
establishing the reserves, our reserves would develop up or down by approximately $132 million resulting in a corresponding
decrease or increase in pre-tax earnings. Many of the same economic forces that would likely cause BI severity to be different
from expected would likely also cause severities for other injury coverages to differ in the same direction.
Our exposure at GEICO to highly uncertain losses is believed to be limited to certain commercial excess umbrella policies
written during a period from 1981 to 1984. Remaining reserves associated with such exposure are currently a relatively
insignificant component of GEICO’s total reserves (approximately 2.1%) and there is minimal apparent asbestos or
environmental liability exposure. Related claim activity over the past year was insignificant.
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