Note 16. Retroactive reinsurance contracts

Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses of short-duration insurance contracts with respect to underlying loss events that occurred prior to the contract inception date. Claims payments may commence immediately after the contract date or, if applicable, once a contractual retention amount has been reached. Reconciliations of the changes in estimated liabilities for retroactive reinsurance unpaid losses and loss adjustment expenses (“claim liabilities”) and related deferred charge reinsurance assumed assets for the nine months ending September 30, 2018 and 2017 follows (in millions).


	2018				2017
	Unpaid losses and loss adjustment expenses		Deferred charges reinsurance assumed		Unpaid losses and loss adjustment expenses		Deferred charges reinsurance assumed
Balances – beginning of year:	$	42,937	$	(15,278)	$	24,972	$	(8,047)

Incurred losses and loss adjustment expenses
Current year contracts		—		—		17,213		(6,170)
Prior years’ contracts		(36)		827		(409)		645

Total		(36)		827		16,804		(5,525)


Paid losses and loss adjustment expenses		(966)		—		(783)		—


Balances – September 30:	$	41,935	$	(14,451)	$	40,993	$	(13,572)

Incurred losses and loss adjustment expenses, net of deferred charges	$	791			$	11,279

In the preceding table, classifications of incurred losses and loss adjustment expenses are based on the inception dates of the contracts. We do not believe that analysis of losses incurred and paid by accident year of the underlying event is relevant or meaningful given that our exposure to losses incepts when the contract incepts. Further, we believe the classifications of reported claims and case development liabilities has little or no practical analytical value.

In the first quarter of 2017, National Indemnity Company (“NICO”), a wholly-owned subsidiary, entered into an agreement with various subsidiaries of American International Group, Inc. (collectively, “AIG”), which became effective on February 2, 2017. Under this agreement, NICO agreed to indemnify AIG for 80% of up to $25 billion of losses and allocated loss adjustment expenses in excess of $25 billion retained by AIG with respect to certain commercial insurance loss events occurring prior to 2016. As of the effective date, we recorded premiums earned of $10.2 billion and losses incurred of $10.2 billion, which consisted of liabilities for unpaid losses and loss adjustment expenses of $16.4 billion and deferred charge reinsurance assumed assets of $6.2 billion. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement. Our estimated ultimate claim liabilities with respect to the AIG contract at September 30, 2018 and at December 31, 2017 were $18.2 billion, which reflected an increase of $1.8 billion in estimated ultimate claim liabilities recorded in the fourth quarter of 2017. Deferred charge assets related to the AIG contract were approximately $7.1 billion at September 30, 2018 and $7.5 billion at December 31, 2017, which included an additional $1.7 billion arising from the aforementioned increase to ultimate claim liabilities in the fourth quarter.

Incurred losses and loss adjustment expenses related to contracts written in prior years were $791 million in the first nine months of 2018 and $236 million in the first nine months of 2017. Such losses included recurring amortization of deferred charge assets and net gains from reductions of estimated ultimate claim liabilities.