Berkshire Hathaway 2011 Annual Report Download - page 83

Management’s Discussion (Continued)
Property and casualty losses (Continued)
the balance sheet date. The timing and amount of loss payments is subject to a great degree of variability and is contingent upon,
among other things, the timing of claim reporting from insureds and cedants and the determination of the ultimate loss amount
through the loss adjustment process. A variety of techniques are used in establishing the liabilities for unpaid losses. Regardless
of the techniques used, significant judgments and assumptions are necessary in projecting the ultimate amounts payable in the
future. As a result, uncertainties are imbedded in and permeate the actuarial loss reserving techniques and processes used.
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 receivables 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 processes and techniques to establish liability estimates that are believed to best fit the particular business.
Additional information regarding those processes and techniques of our significant insurance businesses (GEICO, General Re
and BHRG) follows.
GEICO
GEICO’s gross unpaid losses and loss adjustment expense liabilities as of December 31, 2011 were $10.2 billion, which
included $7.3 billion of reported average, case and case development reserves and $2.9 billion 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 as of December 31, 2011) are: (1) average
reserves (15%), (2) case and case development reserves (60%) 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 ways. 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.
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