Berkshire Hathaway 2012 Annual Report Download - page 93

Management’s Discussion (Continued)
Property and casualty losses (Continued)
BHRG
BHRG’s unpaid losses and loss adjustment expenses as of December 31, 2012 are summarized as follows. Amounts are
in millions.
Property Casualty Total
Reported case reserves ........................................................... $1,962 $ 3,365 $ 5,327
IBNR reserves .................................................................. 2,824 5,044 7,868
Retroactive .................................................................... — 17,991 17,991
Gross reserves .................................................................. $4,786 $26,400 31,186
Deferred charges and ceded reserves ................................................ (4,858)
Net reserves .................................................................... $26,328
In general, the methodologies we use to establish loss reserves vary widely and encompass many of the common
methodologies employed in the actuarial field today. Certain traditional methodologies such as paid and incurred loss
development techniques, incurred and paid loss Bornhuetter-Ferguson techniques and frequency and severity techniques are
utilized, as well as ground-up techniques where appropriate. Additional judgments must also be employed to consider changes
in contract conditions and terms as well as the incidence of litigation or legal and regulatory change.
As of December 31, 2012, our gross loss reserves related to retroactive reinsurance policies were predominately for
casualty or liability losses. Our retroactive policies include excess-of-loss contracts, in which losses (relating to loss events
occurring before a specified date on or before the contract date) above a contractual retention are indemnified or contracts that
indemnify all losses paid by the counterparty after the policy effective date. We paid retroactive reinsurance losses and loss
adjustment expenses of approximately $1.6 billion in 2012. The classification “reported case reserves” has no practical
analytical value with respect to retroactive policies since the amount is often derived from reports in bulk from ceding
companies, who may have inconsistent definitions of “case reserves.” We review and establish loss reserve estimates, including
estimates of IBNR reserves, in the aggregate by contract.
In establishing retroactive reinsurance reserves, we often analyze historical aggregate loss payment patterns and project
losses into the future under various scenarios. The claim-tail is expected to be very long for many policies and may last several
decades. We assign judgmental probability factors to these aggregate loss payment scenarios and an expectancy outcome is
determined. We monitor claim payment activity and review ceding company reports and other information concerning the
underlying losses. Since the claim-tail is expected to be very long for such contracts, we reassess expected ultimate losses as
significant events related to the underlying losses are reported or revealed during the monitoring and review process. In 2012,
changes in retroactive reserves related to contracts written in prior years were not significant.
BHRG’s liabilities for environmental, asbestos and latent injury losses and loss adjustment expenses were approximately
$12.4 billion at December 31, 2012 and $12.3 billion at December 31, 2011 and were concentrated within retroactive
reinsurance contracts. We paid losses in 2012 attributable to these exposures of approximately $862 million. BHRG, as a
reinsurer, does not receive consistently reliable information regarding asbestos, environmental and latent injury claims from all
ceding companies, particularly with respect to multi-line treaty or aggregate excess-of-loss policies. Periodically, we conduct a
ground-up analysis of the underlying loss data of the reinsured to make an estimate of ultimate reinsured losses. When detailed
loss information is unavailable, our estimates can only be developed by applying recent industry trends and projections to
aggregate client data. Judgments in these areas necessarily include the stability of the legal and regulatory environment under
which these claims will be adjudicated. Potential legal reform and legislation could also have a significant impact on
establishing loss reserves for mass tort claims in the future.
The maximum losses payable under our retroactive policies is not expected to exceed approximately $35 billion as of
December 31, 2012, which is based on aggregate contract limits applicable to most of the contracts. Absent significant judicial
or legislative changes affecting asbestos, environmental or latent injury exposures, we currently believe it unlikely that gross
unpaid losses as of December 31, 2012 ($18.0 billion) will develop upward to the maximum loss payable or downward by more
than 15%.
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