Berkshire Hathaway 2014 Annual Report Download - page 109

Management’s Discussion (Continued)
Property and casualty losses (Continued)
GEICO (Continued)
Within the automobile line of business, reserves for liability coverages (such as bodily injury (“BI”), uninsured motorists,
and personal injury protection) are more uncertain due to the longer claim-tails, the greater chance of protracted litigation, and
the incompleteness of facts available at the time the case reserve is first established. As a result case reserves alone are an
insufficient measure of ultimate cost, so we establish additional case development reserve estimates, which are usually
percentages of the case reserve. As of December 31, 2014, case development reserves averaged approximately 25% of the
established case reserves. In general, case development factors are selected by a retrospective analysis of the overall adequacy
of historical case reserves and are reviewed and revised periodically. Approximately 92% of GEICO’s reserves as of
December 31, 2014 were for automobile liability coverages, of which BI coverage accounted for approximately 55%.
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 deducted 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
personnel.
For each significant coverage, we test the adequacy of the aggregate liabilities for unpaid losses 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 liability estimates recorded at the end of 2013 developed downward by $386
million when reevaluated through December 31, 2014, producing a corresponding increase to pre-tax earnings in 2014. These
reserve developments represented approximately 1.9% of earned premiums in 2014 and approximately 3.6% of prior year-end
recorded net liabilities. During 2013, estimated liabilities for pre-2013 occurrences developed downward $238 million or 2.4%
of net liabilities as of the end of 2012. In both years, the downward development reflected overall lower than expected
frequencies and severities. Reserving assumptions at December 31, 2014 were modified as appropriate 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.
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 $185 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.
GEICO’s exposure 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 an immaterial
component of GEICO’s total reserves (approximately 1.2%) and there is minimal apparent asbestos or environmental liability
exposure.
General Re and BHRG
Liabilities for unpaid property and casualty losses and loss adjustment expenses of General Re and BHRG derive primarily
from reinsurance contracts. Additional uncertainties are unique to the processes used in estimating reinsurance liabilities. The
nature, extent, timing and perceived reliability of information received from ceding companies varies widely depending on the
type of coverage and the contractual reporting terms. Contract terms, conditions and coverages also tend to lack standardization
and may evolve more rapidly than under primary insurance policies.
The nature and extent of loss information provided under many facultative (individual risk), per occurrence excess or
retroactive reinsurance contracts may not differ significantly from the information received under a primary insurance contract,
if reinsurer personnel either work closely with the ceding company in settling individual claims or manage the claims
themselves. However, loss information related to aggregate excess-of-loss contracts, including catastrophe losses and quota-
share treaties, is often less detailed. Loss information may be reported in a summary format rather than on an individual claim
basis. Loss data is usually provided through periodic reports, which may include currently recoverable losses, as well as case
loss estimates. Ceding companies infrequently provide IBNR estimates to reinsurers.
107