Reserve for Loss and Loss Adjustment Expenses |
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Reserve for Loss and Loss Adjustment Expenses | Reserve for Loss and Loss Adjustment Expenses The Company uses both historical experience and industry-wide loss development factors to 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 rates of inflation, which 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 the 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, claims handling, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. The reserving process begins with the collection and analysis of paid losses and incurred claims data for each of the Company's contracts. While reserves are mostly reviewed on a contract by contract basis, paid loss and incurred claims data is also aggregated into reserving segments. The segmental data is disaggregated by reserving class and further disaggregated by either accident year (i.e. the year in which the loss event occurred) or by underwriting year (i.e. the year in which the contract generating the premium and losses incepted). In cases where the Company uses underwriting year information, reserves are subsequently allocated to the respective accident year. The reserve for loss and LAE consists of:
The following table represents a reconciliation of our beginning and ending gross and net loss and LAE reserves:
Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves established in previous calendar years. The favorable or unfavorable development reflects changes in management's best estimate of the ultimate losses under the relevant reinsurance policies after considerable review of changes in actuarial assessments. The Company recognized net adverse prior year loss development of $7,834 and $15,984 for the three and nine months ended September 30, 2023, respectively (2022 - adverse $834 and favorable $5,493, respectively). In the Diversified Reinsurance segment, there was adverse prior year loss development of $1,864 and $3,938 for the three and nine months ended September 30, 2023, respectively (2022 - favorable $590 and $1,975, respectively). Prior year loss development for the three and nine months ended September 30, 2023 was driven by adverse development primarily due to a German auto program in run-off from the International unit along with development from other runoff business lines and also included the recognition of expected credit losses on reinsurance recoverable on unpaid losses for the year-to-date period. 9. Reserve for Loss and Loss Adjustment Expenses (continued) Prior year loss development for the three and nine months ended September 30, 2022 was primarily due to favorable reserve development in German Auto Programs and GLS reinsurance contracts partly offset by adverse development in European Capital Solutions. In the AmTrust Reinsurance segment, net adverse prior year loss development was $5,970 and $12,046 during the three and nine months ended September 30, 2023, respectively (2022 - adverse $1,424 and favorable $3,518, respectively). Net adverse prior year loss development for the three and nine months ended September 30, 2023 was primarily from European Hospital Liability for the three months ended September 30, 2023, and European Hospital Liability and the AmTrust Quota Share (General Liability and Commercial Auto Liability partly offset by continued favorable development in Workers Compensation) for the nine months ended September 30, 2023. Net adverse loss development on European Hospital Liability was primarily driven by emergence of loss data during 2023 on underwriting years 2011 to 2016. Net adverse prior year loss development for the three months ended September 30, 2022 was driven by unfavorable movements in European Hospital Liability due to higher than expected loss emergence in Italian Hospital Liability policies as well as the agreed exit cost of $3,666 (€3,444) for the commutation of French Hospital Liability policies as described in "Note 10. Related Party Transactions"; partly offset by favorable runoff of Workers Compensation business. The net favorable prior year loss development for the nine months ended September 30, 2022 included $5,346 of favorable reserve adjustments for estimated surcharges on Workers' Compensation policies and inuring AmTrust reinsurance for programs in Specialty Risk and Extended Warranty cessions ("AmTrust Cession Adjustments"). Excluding AmTrust Cession Adjustments, there was adverse development of $1,828 for the nine months ended September 30, 2022 driven by unfavorable movements in European Hospital Liability due to higher than expected loss emergence in Italian Hospital Liability policies as well as the agreed exit cost of $3,666 (€3,444 for commutation of French Hospital Liability policies as described in "Note 10. Related Party Transactions"; partly offset by favorable runoff of Workers Compensation business. The increase in the deferred gain on retroactive reinsurance was $11,129 for the nine months ended September 30, 2023 (2022 - $12,024 decrease). This included an increase in the deferred gain liability and related reinsurance recoverable on unpaid losses under the LPT/ADC Agreement with Cavello of $11,108 for the nine months ended September 30, 2023 (2022 - $10,722 decrease) caused by adverse development on loss reserves covered under the LPT/ADC Agreement (2022 - favorable). The deferred gain on retroactive reinsurance under the LPT/ADC Agreement represents the cumulative adverse development for covered risks in the AmTrust Quota Share as of September 30, 2023 and December 31, 2022. Amortization of the deferred gain will not occur until paid losses have exceeded the minimum retention under the LPT/ADC Agreement, which is estimated to be in 2025.
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