Reserve for Loss and Loss Adjustment Expenses |
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Insurance [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reserve for Loss and Loss Adjustment Expenses | Reserve for Loss and Loss Adjustment Expenses Our reserve for loss and LAE comprises:
The following table represents a reconciliation of our beginning and ending gross and net loss and LAE reserves:
Management believes that its use of both historical experience and industry-wide loss development factors provide a reasonable basis for estimating future losses. In the future, certain events may be beyond the control of management, such as changes in law, judicial interpretations of law, and inflation may favorably or unfavorably impact the ultimate settlement of the Company’s loss and LAE reserves. The anticipated effect of inflation is implicitly considered when estimating liabilities for loss and LAE. While anticipated changes in claim costs due to inflation are considered in estimating the ultimate claim costs, changes in average severity of claims are caused by a number of factors that vary with the individual type of policy written. Ultimate losses are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves in previous calendar years. The development reflects changes in management's best estimate of the ultimate losses under the relevant reinsurance policies after review of changes in actuarial assessments. During 2016, the Company increased loss reserves for 2015 and prior years by $219,452 or 9.0% of prior year net loss and LAE reserves compared to $74,866 or 3.3% in 2015 and of $18,846 or 1.0% in 2014, respectively. The increase in prior year incurred losses was primarily due to the reserve charge implemented in the fourth quarter as well as new premium ceded during 2016 on prior underwriting year contracts. Due to loss sensitive features of certain contracts, favorable (or unfavorable) loss reserve development does not necessarily result in a commensurate amount of additional (or reduced) underwriting income as ceding commission may be adjusted proportionally to the amount of loss development, pursuant to the terms of the individual contracts. The Company recognized approximately $165,343 of adverse development, net of commission changes on adjustable contracts for the full year. This was largely due to significant fourth quarter adverse development in commercial auto liability in both the Diversified Reinsurance and AmTrust Reinsurance segments. For the Diversified Reinsurance segment, adverse development was $96,788 (2015 - adverse development $49,856, 2014 - favorable development $14,959) for the full year, including the fourth quarter of 2016 reserve charge as well as adverse development experienced in prior quarters of 2016. For the AmTrust Reinsurance segment, adverse development was $54,000, (2015 - adverse development $9,100, 2014 - adverse development $13,900) largely related to program commercial auto as well as program general liability. 9. Reserve for Loss and Loss Adjustment Expenses (continued)
The adoption of ASU 2015-09 Disclosures about Short-Duration Contracts did not change any of the methodologies or assumptions used in compiling data used in the Company's Consolidated Financial Statements or in estimating incurred losses. Incurred loss and LAE reflects estimates of ultimate losses based on information received from cedants or obtained through reviews of industry trends, regarding claims incurred prior to the end of each financial year. A (redundancy) or deficiency arises when the re-estimation of reserves is (lower) or greater than its estimation at the preceding year-end. The cumulative (redundancies) or deficiencies reflect cumulative differences between the initial reported net reserves and the currently re-estimated net reserves. Annual changes in the estimates are reflected in the consolidated statement of income for each year as the liabilities are re-estimated. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. IBNR estimates will be negative where our history indicates favorable future emergence is the best estimate. For all lines, the Company’s objective is to estimate ultimate loss and LAE. As a result, the reserve for loss and LAE include significant estimates for IBNR reserves. Please refer to "Note 2. Significant Accounting Policies" for the accounting policy and methodology for determining loss reserves. As a reinsurer of primarily quota share contracts, claim counts are frequently unavailable and as a result they are not a methodology applied in our loss reserving process and therefore claim counts have not been provided in the table below as it is impractical to do so. The following is a summary of the Company's incurred losses and paid losses development by accident year, net of reinsurance, from the last six calendar years including the total reserve for losses IBNR plus development on reported loss and LAE for both our reportable segments, Diversified Reinsurance and AmTrust Reinsurance, as of December 31, 2016. Information prior to 2016 is included as unaudited supplementary information. As a reinsurer we are reliant on our cedants to provide us with this detailed information. Six years of information has been presented only as it was impractical to obtain the sufficiently detailed additional information on those earlier years. The incurred and paid amounts have been translated from the local currency to U.S. dollars using the December 31, 2016 spot rate for all years presented in the table below in order to isolate changes in foreign exchange rates from loss development. Information regarding our Other category has not been presented in the development tables below but is included in the reconciliation, as these losses include amounts from our former NGHC Quota Share segment and the remnants of the U.S. excess and surplus business, which are in run-off. There are a number of factors to consider when considering the information in these tables:
9. Reserve for Loss and Loss Adjustment Expenses (continued) The following table represents information on the Company's incurred losses and LAE and cumulative paid losses and LAE, both net of reinsurance, since 2011 for our Diversified Reinsurance segment. The development tables below included reserves acquired from the loss portfolio transfer agreement associated with the GMAC RE business as at October 31, 2008 of $755,554 and reserves acquired from the loss portfolio transfer agreement associated with the GMAC International Insurance Services business as at November 30, 2010 of $98,827. For the purposes of the disclosure, the reserves from each of the loss portfolio transfers were allocated to the original accident year. Prior period information is unaudited and is presented as required supplementary information.
9. Reserve for Loss and Loss Adjustment Expenses (continued) The following table represents information on the Company's incurred losses and LAE and cumulative paid losses and LAE, both net of reinsurance, since 2011 for our AmTrust Reinsurance segment. Prior period information is unaudited and is presented as required supplementary information.
9. Reserve for Loss and Loss Adjustment Expenses (continued) The following table represents a reconciliation of the net incurred and paid claims development tables to the reserve for loss and LAE in the Consolidated Balance Sheet:
The following unaudited supplementary information represents the average annual percentage payout of net loss and LAE by age, net of reinsurance, for both our reportable segments as of December 31, 2016:
The average annual payout of incurred claims by age, net of reinsurance, is calculated using the amount of claims paid in each development year and is compared with the estimated incurred claims as of the most recent period presented. |