Berkshire Hathaway 2011 Annual Report Download - page 84

Management’s Discussion (Continued)
Property and casualty losses (Continued)
GEICO (Continued)
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, 2011, 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.
Unpaid loss and loss adjustment expense estimates recorded at the end of 2010 developed downward by $474 million when
reevaluated through December 31, 2011, producing a corresponding increase to pre-tax earnings in 2011. These downward
reserve developments represented approximately 3.1% of earned premiums in 2011 and approximately 5.1% of prior year-end
recorded liabilities. Reserving assumptions at December 31, 2011 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 92% of GEICO’s reserves as of December 31, 2011 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 $147 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 liabilities associated with such exposure are currently a relatively
insignificant component of GEICO’s total reserves (approximately 1.8%) and there is minimal apparent asbestos or
environmental liability exposure. Related claim activity over the past year was insignificant.
General Re and BHRG
Liabilities for unpaid property and casualty losses and loss adjustment expenses of our General Re and BHRG underwriting
units derive primarily from assumed reinsurance. Additional uncertainties are unique to the processes used in estimating such
reinsurance liabilities. The nature, extent, timing and perceived reliability of information received from ceding companies varies
widely depending on the type of coverage, the contractual reporting terms (which are affected by market conditions and
practices) and other factors. Due to the lack of standardization of contract terms and conditions, the wide variability of coverage
needs of individual clients and the tendency for those needs to change rapidly in response to market conditions, the ongoing
economic impact of such uncertainties, in and of themselves, cannot be reliably measured.
The nature and extent of loss information provided under many facultative, per occurrence excess or retroactive contracts
may not differ significantly from the information received under a primary insurance contract. This occurs when our personnel
either works closely with the ceding company in settling individual claims or manages the claims themselves. However, loss
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