Allstate 2008 Annual Report Download - page 278

7. Reserve for Property-Liability Insurance Claims and Claims Expense
As described in Note 2, the Company establishes reserves for claims and claims expense (‘‘loss’’) on reported
and unreported claims of insured losses. The Company’s reserving process takes into account known facts and
interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims
paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management
programs, product mix and contractual terms, law changes, court decisions, changes to regulatory requirements
and economic conditions. In the normal course of business, the Company may also supplement its claims
processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information
sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly
considered in the reserving process.
Because reserves are estimates of the unpaid portions of losses that have occurred, including incurred but
not reported (‘‘IBNR’’) losses, the establishment of appropriate reserves, including reserves for catastrophes, is an
inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts,
which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves
for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not
been reported or settled. The Company regularly updates its reserve estimates as new information becomes
available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve
estimates, which may be material, are reported in property-liability insurance claims and claims expenses in the
Consolidated Statements of Operations in the period such changes are determined.
Activity in the reserve for property-liability insurance claims and claims expense is summarized as follows:
2008 2007 2006
($ in millions)
Balance at January 1 $18,865 $18,866 $22,117
Less reinsurance recoverables 2,205 2,256 3,186
Net balance at January 1 16,660 16,610 18,931
Incurred claims and claims expense related to:
Current year 19,894 17,839 16,988
Prior years 170 (172) (971)
Total incurred 20,064 17,667 16,017
Claims and claims expense paid related to:
Current year 12,658 10,933 10,386
Prior years 6,884 6,684 7,952
Total paid 19,542 17,617 18,338
Net balance at December 31 17,182 16,660 16,610
Plus reinsurance recoverables 2,274 2,205 2,256
Balance at December 31 $19,456 $18,865 $18,866
Incurred claims and claims expense represents the sum of paid losses and reserve changes in the calendar
year. This expense includes losses from catastrophes of $3.34 billion, $1.41 billion and $810 million in 2008, 2007
and 2006, respectively, net of reinsurance and other recoveries (see Note 9). In 2008, losses from catastrophes
included $1.31 billion, net of recoveries, related to Hurricanes Ike and Gustav. These estimates include net losses
in personal lines auto and property policies and net losses on commercial policies. Included in 2008 and 2006
losses from catastrophes are accruals for assessments from Texas Windstorm Insurance Association (‘‘TWIA’’) and
Citizens Property Insurance Corporation in the state of Florida (‘‘FL Citizens’’), respectively (see Note 13).
Catastrophes are an inherent risk of the property-liability insurance business that have contributed to, and
will continue to contribute to, material year-to-year fluctuations in the Company’s results of operations and
financial position.
The Company calculates and records a single best reserve estimate for losses from catastrophes, in
conformance with generally accepted actuarial principles. As a result, management believes that no other estimate
is better than the recorded amount. Due to the uncertainties involved, including the factors described above, the
ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best
estimates. Accordingly, management believes that it is not practical to develop a meaningful range for any such
changes in losses incurred.
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Notes