(14)

Unpaid losses and loss adjustment expenses

The liabilities for unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs associated with property and casualty claim occurrences as of the balance sheet dates. A reconciliation of the changes in liabilities for unpaid losses and loss adjustment expenses of our property/casualty insurance subsidiaries for each of the three years ending December 31, 2015 is as follows (in millions).


	2015			2014			2013
Unpaid losses and loss adjustment expenses:
Gross liabilities at beginning of year	$	71,477		$	64,866		$	64,160
Ceded losses and deferred charges at beginning of year		(10,888	)		(7,414	)		(6,944	)

Net balance at beginning of year		60,589			57,452			57,216

Incurred losses recorded during the year:
Current year loss events		27,829			27,771			23,027
Prior years’ loss events		(1,302	)		(1,365	)		(1,752	)

Total incurred losses		26,527			26,406			21,275

Payments during the year with respect to:
Current year loss events		(13,070	)		(11,289	)		(10,154	)
Prior years’ loss events		(11,419	)		(11,381	)		(10,978	)

Total payments		(24,489	)		(22,670	)		(21,132	)

Foreign currency translation adjustment		(545	)		(666	)		93
Business acquisitions		68			67			—

Unpaid losses and loss adjustment expenses:
Net balance at end of year		62,150			60,589			57,452
Ceded losses and deferred charges at end of year		10,994			10,888			7,414

Gross liabilities at end of year	$	73,144		$	71,477		$	64,866

Incurred losses shown in the preceding table represent loss and loss adjustment expenses recorded in earnings in each year. Such losses pertain to loss events occurring during the current year and losses pertaining to prior year events. Classifications of incurred losses related to our retroactive reinsurance contracts are based on the inception dates of the contracts. Incurred losses attributable to prior years’ loss events reflect the amount of estimation error charged or credited to earnings during the year with respect to liabilities as of the beginning of the year.

Incurred losses include the changes in deferred charge assets recorded on retroactive reinsurance contracts and discounts of workers’ compensation liabilities assumed under certain reinsurance contracts. Deferred charges and liability discounts represent the time value of the related ultimate estimated claim liabilities. Discounted workers’ compensation liabilities at December 31, 2015 and 2014 were $1,964 million and $2,035 million, respectively, reflecting net discounts of $1,579 million and $1,745 million, respectively, while unamortized deferred charges on retroactive reinsurance contracts were $7,687 million at December 31, 2015 and $7,772 million at December 31, 2014.

A summary of the impact of deferred charges and liability discounts on incurred losses recorded during the year with respect to prior years’ loss events follows (in millions):


	2015			2014			2013
Incurred losses before the effects of deferred charges and liability discounts	$	(1,545	)	$	(1,493	)	$	(1,938	)
Incurred losses from changes in deferred charges and liability discounts		243			128			186

Incurred losses prior years	$	(1,302	)	$	(1,365	)	$	(1,752	)

Before the effects of changes in deferred charges and liability discounts, incurred losses included reductions for prior years’ events of approximately $1.5 billion in 2015 and 2014 and $1.9 billion in 2013. In each year, these reductions derived from our direct insurance business (including private passenger automobile, medical malpractice and other commercial coverages), as well as from reinsurance business, partially offset by increases related to retroactive reinsurance. The reductions for reinsurance business were primarily attributable to lower than expected reported losses from ceding companies with respect to both property and casualty coverages. Underlying claim counts and average amounts per claim are not consistently utilized by our reinsurance businesses, as clients do not consistently provide reliable data in sufficient detail. We increased liabilities related to prior years’ retroactive reinsurance contracts by approximately $550 million in 2015 and $825 million in 2014, primarily due to net increases in estimated asbestos and environmental liabilities. Loss estimates are regularly adjusted to consider updated loss development patterns and emergence of prior years’ losses, whether favorable or unfavorable.

We are exposed to environmental, asbestos and other latent injury claims arising from insurance and reinsurance contracts. Liability estimates for these exposures include case basis reserves and also reflect reserves for legal and other loss adjustment expenses and IBNR reserves. IBNR reserves are based upon our historic general liability exposure base and policy language, previous environmental loss experience and the assessment of current trends of environmental law, environmental cleanup costs, asbestos liability law and judgmental settlements of asbestos liabilities.

The liabilities for environmental, asbestos and other latent injury claims and claims expenses, net of reinsurance recoverables, were approximately $14.0 billion at December 31, 2015 and $14.4 billion at December 31, 2014. These liabilities included approximately $12.4 billion at December 31, 2015 and $12.7 billion at December 31, 2014 assumed under retroactive reinsurance contracts. Liabilities arising from retroactive contracts with exposure to claims of this nature are generally subject to aggregate policy limits. Thus, our exposure to environmental and other latent injury claims under these contracts is likewise limited. We monitor evolving case law and its effect on environmental and other latent injury claims. Changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could result in increases in these liabilities. Such development could be material to our results of operations. We are unable to reliably estimate the amount of additional net loss or the range of net loss that is reasonably possible.