Berkshire Hathaway 2010 Annual Report Download - page 91

Management’s Discussion (Continued)
Property and casualty losses (Continued)
General Re (Continued)
policy limits), changes in loss trends and changes in legal trends that result in unanticipated losses, as well as other sources of
statistical variability. Collectively, these factors influence the selection of the expected loss emergence patterns.
We select expected loss ratios by reserve cell, by accident year, based upon reviewing forecasted losses and indicated
ultimate loss ratios that are predicted from aggregated pricing statistics. Indicated ultimate loss ratios are calculated using the
selected loss emergence pattern, reported losses and earned premium. If the selected emergence pattern is not accurate, then the
indicated ultimate loss ratios may not be accurate, which can affect the selected loss ratios and hence the IBNR reserve. As with
selected loss emergence patterns, selecting expected loss ratios is not a strictly mechanical process and judgment is used in the
analysis of indicated ultimate loss ratios and department pricing loss ratios.
We estimate IBNR reserves by reserve cell, by accident year, using the expected loss emergence patterns and the expected
loss ratios. The expected loss emergence patterns and expected loss ratios are the critical IBNR reserving assumptions and are
updated annually. Once the annual IBNR reserves are determined, our actuaries calculate expected case loss emergence for the
upcoming calendar year. These calculations do not involve new assumptions and use the prior year-end expected loss
emergence patterns and expected loss ratios. The expected losses are then allocated into interim estimates that are compared to
actual reported losses in the subsequent year. This comparison provides a test of the adequacy of prior year-end IBNR reserves
and forms the basis for possibly changing IBNR reserve assumptions during the course of the year.
In 2010, for prior years’ workers’ compensation losses, our reported claims were less than expected claims by
$148 million. However, further analysis of the workers’ compensation reserve cells by segment indicated the need for
additional IBNR. These developments precipitated $123 million of a net increase in nominal IBNR reserve estimates for
unreported occurrences. After deducting $123 million for the change in net reserve discounts during the year, the net increase
in workers’ compensation losses from prior years’ occurrences reduced pre-tax earnings in 2010 by $98 million. To illustrate
the sensitivity of changes in expected loss emergence patterns and expected loss ratios for our significant excess-of-loss
workers’ compensation reserve cells, an increase of ten points in the tail of the expected emergence pattern and an increase
of ten percent in the expected loss ratios would produce a net increase in our nominal IBNR reserves of approximately
$723 million and $377 million on a discounted basis as of December 31, 2010. The increase in discounted reserves would
produce a corresponding decrease in pre-tax earnings. We believe it is reasonably possible for the tail of the expected loss
emergence patterns and expected loss ratios to increase at these rates.
Our other casualty and general liability reported losses (excluding mass tort losses) developed downwards in 2010 relative
to expectations. Casualty losses tend to be long-tail and it should not be assumed that favorable loss experience in a given year
means that loss reserve amounts currently established will continue to develop favorably. For our significant other casualty and
general liability reserve cells (including medical malpractice, umbrella, auto and general liability), an increase of five points in
the tails of the expected emergence patterns and an increase of five percent in expected loss ratios (one percent for large
international proportional reserve cells) would produce a net increase in our nominal IBNR reserves and a corresponding
reduction in pre-tax earnings of approximately $902 million. We believe it is reasonably possible for the tail of the expected loss
emergence patterns and expected loss ratios to increase at these rates in any of the individual aforementioned reserve cells.
However, given the diversification in worldwide business, more likely outcomes are believed to be less than $902 million.
Our property losses were lower than expected in 2010 but the nature of property loss experience tends to be more volatile
because of the effect of catastrophes and large individual property losses. In response to favorable claim developments and
another year of information, estimated remaining World Trade Center losses were reduced by $17 million.
In certain reserve cells within excess directors and officers and errors and omissions (“D&O and E&O”) coverages,
IBNR reserves are based on estimated ultimate losses without consideration of expected emergence patterns. These cells
often involve a spike in loss activity arising from recent industry developments making it difficult to select an expected loss
emergence pattern. For our large D&O and E&O reserve cells an increase of ten points in the tail of the expected emergence
pattern (for those cells where emergence patterns are considered) and an increase of ten percent in the expected loss ratios
would produce a net increase in nominal IBNR reserves and a corresponding reduction in pre-tax earnings of approximately
$190 million. We believe it is reasonably possible for the tail of the expected loss emergence patterns and expected loss
ratios to increase at these rates.
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