Berkshire Hathaway 2012 Annual Report Download - page 89

Management’s Discussion (Continued)
Property and casualty losses (Continued)
GEICO (Continued)
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 in order 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 personnel.
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 2011 developed downward by $736 million when
reevaluated through December 31, 2012, producing a corresponding increase to pre-tax earnings in 2012. These downward
reserve developments represented approximately 4.4% of earned premiums in 2012 and approximately 7.2% of prior year-end
recorded liabilities. Reserving assumptions at December 31, 2012 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, 2012 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 $154 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 a relatively
insignificant component of GEICO’s total reserves (approximately 1.5%) 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. Contract terms and conditions tend to lack standardization and contract terms, conditions and
coverages may evolve more rapidly than under primary insurance policies. We are unable to reliably measure the ongoing
economic impact of such uncertainties.
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
information related to aggregate excess-of-loss contracts, including catastrophe losses and quota-share treaties, is often less
detailed. Occasionally, loss information is reported in a summary format rather than on an individual claim basis. Loss data is
usually provided through periodic reports and may include the amount of ceded losses paid where reimbursement is sought as
well as case loss reserve estimates. Ceding companies infrequently provide IBNR estimates to reinsurers.
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