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Claim and Claim Adjustment Expense Reserves
 9 Months Ended
Sep. 30, 2018
Liability for Claims and Claims Adjustment Expense [Abstract]  
Claim and Claim Adjustment Expense Reserves
Claim and Claim Adjustment Expense Reserves
The Company's property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including incurred but not reported (IBNR) claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions, including inflation, and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $46 million and $106 million for the three and nine months ended September 30, 2018. Net catastrophe losses for the three and nine months ended September 30, 2018 included $35 million related to Hurricane Florence. The remaining catastrophe losses in 2018 resulted primarily from U.S. weather-related events. The Company reported catastrophe losses, net of reinsurance, of $269 million and $342 million for the three and nine months ended September 30, 2017. Net catastrophe losses for the three and nine months ended September 30, 2017 included $149 million related to Hurricane Harvey, $95 million related to Hurricane Irma and $20 million related to Hurricane Maria and also required reinsurance reinstatement premium of $6 million. The remaining catastrophe losses in 2017 resulted primarily from U.S. weather-related events.
Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group segment.
For the nine months ended September 30
 
 
 
(In millions)
2018
 
2017
Reserves, beginning of year:
 
 
 
Gross
$
22,004

 
$
22,343

Ceded
3,934

 
4,094

Net reserves, beginning of year
18,070

 
18,249

Net incurred claim and claim adjustment expenses:
 
 
 
Provision for insured events of current year
3,866

 
3,949

Decrease in provision for insured events of prior years
(173
)
 
(284
)
Amortization of discount
136

 
138

Total net incurred (1)
3,829

 
3,803

Net payments attributable to:
 
 
 
Current year events
(658
)
 
(560
)
Prior year events
(3,415
)
 
(3,401
)
Total net payments
(4,073
)
 
(3,961
)
Foreign currency translation adjustment and other
(80
)
 
110

Net reserves, end of period
17,746

 
18,201

Ceded reserves, end of period
3,858

 
4,008

Gross reserves, end of period
$
21,604

 
$
22,209


(1)
Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits which are not reflected in the table above.
Net Prior Year Development
Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. The following table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2018
 
2017
 
2018
 
2017
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Specialty
$
(53
)
 
$
(99
)
 
$
(127
)
 
$
(134
)
Commercial
(5
)
 
(17
)
 
(27
)
 
(94
)
International
(2
)
 
1

 
(4
)
 
1

Corporate & Other
(2
)
 
—

 
(2
)
 
—

Total pretax (favorable) unfavorable development
$
(62
)
 
$
(115
)
 
$
(160
)
 
$
(227
)
Specialty
The following table presents further detail of the development recorded for the Specialty segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2018
 
2017
 
2018
 
2017
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Medical Professional Liability
$
15

 
$
8

 
$
38

 
$
30

Other Professional Liability and Management Liability
(45
)
 
(19
)
 
(113
)
 
(88
)
Surety
(20
)
 
(82
)
 
(50
)
 
(82
)
Warranty
(1
)
 
(1
)
 
(7
)
 
5

Other
(2
)
 
(5
)
 
5

 
1

Total pretax (favorable) unfavorable development
$
(53
)
 
$
(99
)
 
$
(127
)
 
$
(134
)

Three Months
2018
Unfavorable development in medical professional liability was primarily driven by higher than expected frequency and severity in aging services in accident years 2014 through 2017.
Favorable development in other professional liability and management liability was primarily driven by favorable outcomes on individual claims in accident years 2013 and prior in financial institutions.
Favorable development in surety was due to continued lower than expected loss emergence for accident years 2017 and prior.
2017
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency in accident years 2012 through 2015, primarily for professional liability products.
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.
Nine Months
2018
Unfavorable development for medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017 in our hospitals business and higher than expected frequency and severity in aging services in accident years 2014 through 2017.
Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency for accident years 2013 through 2017 related to financial institutions and professional liability errors and omissions (E&O), favorable severity for accident years 2012 and prior related to professional liability E&O, and favorable outcomes on individual claims in financial institutions in accident years 2013 and prior.
Favorable development for surety was due to lower than expected loss emergence for accident years 2017 and prior.
2017
Unfavorable development in medical professional liability was primarily due to continued higher than expected frequency in aging services.
Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and a lower frequency of large losses for accident years 2011 through 2016 for professional and management liability, lower than expected claim frequency in accident years 2012 through 2015 for professional liability and lower than expected severity in accident years 2014 through 2016 for professional liability.
Favorable development in surety coverages was primarily due to lower than expected frequency of large losses in accident years 2015 and prior.
Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2018
 
2017
 
2018
 
2017
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Commercial Auto
$
1

 
$
(12
)
 
$
—

 
$
(37
)
General Liability
(5
)
 
(2
)
 
13

 
(19
)
Workers' Compensation
(2
)
 
9

 
(14
)
 
(38
)
Property and Other
1

 
(12
)
 
(26
)
 
—

Total pretax (favorable) unfavorable development
$
(5
)
 
$
(17
)
 
$
(27
)
 
$
(94
)

Three Months
2017
Favorable development in commercial auto was primarily due to lower than expected severity in accident years 2015 and 2016, as well as a large favorable recovery on a claim in accident year 2012.
Unfavorable development in workers' compensation reflects the recognition of loss estimates related to favorable premium development as well as an adverse arbitration ruling related to reinsurance recoverables from older accident years.
Nine Months
2018
Unfavorable development in general liability was driven by higher than expected claim severity in umbrella in accident years 2013 through 2015. 
Favorable development in property and other was driven by lower than expected claim severity in catastrophes in accident year 2017.
2017
Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2013 through 2016, as well as a large favorable recovery on a claim in accident year 2012.
Favorable development for general liability was due to lower than expected severity in life sciences.
Favorable development for workers’ compensation was primarily related to decreases in frequency and severity in recent accident years, partially attributable to California reforms related to decreases in medical costs. This was partially offset by unfavorable development related to an adverse arbitration ruling on reinsurance recoverables from older accident years as well as the recognition of loss estimates associated with favorable premium development.
International
The following table presents further detail of the development recorded for the International segment.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2018
 
2017
 
2018
 
2017
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Casualty
$
(5
)
 
$
6

 
$
(11
)
 
$
7

Property
1

 
(7
)
 
13

 
(18
)
Energy and Marine
(5
)
 
(6
)
 
(10
)
 
(9
)
Specialty
8

 
5

 
17

 
20

Healthcare and Technology
(1
)
 
3

 
(13
)
 
1

Total pretax (favorable) unfavorable development
$
(2
)
 
$
1

 
$
(4
)
 
$
1


Nine Months
2018
Favorable development in casualty was primarily driven by better than expected frequency in the liability portion of the package business in Canada and general liability in Europe.
Unfavorable development in property was primarily driven by higher than expected severity in Canada and higher than expected frequency in CNA Hardy, both in accident year 2017.
Favorable development in energy and marine was primarily driven by better than expected large loss frequency in the energy book in recent accident years.
Unfavorable development in specialty was driven by increased severity in accident year 2017 related to professional indemnity.
Favorable development in healthcare and technology was primarily driven by lower than expected frequency in accident years 2015 and prior related to healthcare in Europe.
2017
Favorable development for property was due to better than expected frequency in accident years 2014 through 2016.
Unfavorable development for specialty was primarily due to higher than expected severity in accident year 2015 arising from the management liability business, partially offset by favorable development in accident years 2014 and prior. Additional unfavorable development was related to adverse large claims experience in the CNA Hardy political risks portfolio, relating largely to accident year 2016.
Asbestos and Environmental Pollution (A&EP) Reserves
In 2010, Continental Casualty Company (CCC) together with several of the Company’s other insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO through a Loss Portfolio Transfer (LPT). At the effective date of the transaction, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO LPT aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.
In years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statement of Operations.
The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
Periods ended September 30
Three Months
 
Nine Months
(In millions)
2018
 
2017
 
2018
 
2017
Additional amounts ceded under LPT:
 
 
 
 
 
 
 
Net A&EP adverse development before consideration of LPT
$
—

 
$
—

 
$
113

 
$
60

Provision for uncollectible third-party reinsurance on A&EP
—

 
—

 
(16
)
 
—

Total additional amounts ceded under LPT
—

 
—

 
97

 
60

Retroactive reinsurance benefit recognized
(12
)
 
(17
)
 
(84
)
 
(60
)
Pretax impact of deferred retroactive reinsurance
$
(12
)
 
$
(17
)
 
$
13

 
$
—


Based upon the Company's annual A&EP reserve review, net unfavorable prior year development of $113 million and $60 million was recognized before consideration of cessions to the LPT for the nine months ended September 30, 2018 and 2017. Additionally, in 2018, the Company released a portion of its provision for uncollectible third party reinsurance. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos environmental accounts and paid losses on assumed reinsurance exposures. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. The Company expects to complete another A&EP reserve review in the fourth quarter of 2018 and intends to maintain that timing going forward annually.
As of September 30, 2018 and December 31, 2017, the cumulative amounts ceded under the LPT were $3.0 billion and $2.9 billion. The unrecognized deferred retroactive reinsurance benefit was $339 million and $326 million as of September 30, 2018 and December 31, 2017.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $3.2 billion and $3.1 billion as of September 30, 2018 and December 31, 2017. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the Company’s A&EP claims.