INSURANCE

We conduct insurance underwriting operations primarily through The American Road Insurance Company (“TARIC”) and other subsidiaries. TARIC is a wholly owned subsidiary of Ford Credit operating in the United States and Canada. TARIC provides physical damage insurance coverage for Ford Credit financed vehicles at dealer locations and Ford and Lincoln vehicles in transit between final assembly plants and dealer locations. In addition, TARIC provides a variety of insurance products and services to Ford and its affiliates, including contractual liability insurance on extended service contracts. For Ford US, TARIC provides commercial automobile and general liability insurance, and surety bonds.

Insurance premiums earned are reported net of reinsurance as Insurance premiums earned. These premiums are earned over their respective policy periods. Physical damage insurance premiums, including premiums on vehicles financed at wholesale by us, are recognized as income on a monthly basis. Premiums from extended service plan contracts and other contractual liability coverages are earned over the life of the policy based on historical loss experience. Commissions and premium taxes are deferred and amortized over the term of the related policies on the same basis on which premiums are earned.

TARIC is required by law to maintain deposits with regulatory authorities. These deposited securities totaled $12 million and $13 million at December 31, 2015 and 2014, respectively.

Insurance Expenses and Liabilities

Insurance underwriting losses and expenses are reported as Insurance expenses. The components of insurance expenses were as follows for the years ended December 31 (in millions):



	2015			2014			2013
Insurance losses	$	80		$	115		$	70
Loss adjustment expenses	5			6			6
Reinsurance income and other expenses, net	(16		)	(14		)	(13		)
Insurance expenses	$	69		$	107		$	63

The insurance loss and loss adjustment expenses, net of recoveries, with related parties were $36 million, $30 million, and $26 million for the years ended December 31, 2015, 2014, and 2013, respectively.

Reserves for insurance losses and loss adjustment expenses are established based on actuarial estimates and historical loss development patterns, which represents management’s best estimate. If management believes the reserves do not reflect all losses due to changes in conditions, or other relevant factors, an adjustment is made based on management judgment. The reserve for reported insurance losses and an estimate of unreported insurance losses, based on past experience, was $8 million and $11 million at December 31, 2015 and 2014, respectively, and was included in Other liabilities and deferred income.

Reinsurance

Reinsurance activity primarily consists of ceding a majority of automotive extended service plan contracts for a ceding commission. Amounts recoverable from reinsurers on unpaid losses, including incurred but not reported losses, and amounts paid to reinsurers relating to the unexpired portion of reinsurance contracts are reported in Other assets. Ceded insurance expenses that were deducted from the amounts reported as Insurance expenses were $76 million, $68 million, and $64 million for the years ended December 31, 2015, 2014, and 2013, respectively.

NOTE 12. INSURANCE (Continued)

The effect of reinsurance on premiums written and earned was as follows for the years ended December 31 (in millions):



	2015						2014						2013
	Written			Earned			Written			Earned			Written			Earned
Direct	$	328		$	254		$	293		$	230		$	270		$	216
Assumed	—			—			—			—			—			—
Ceded	(194		)	(121		)	(166		)	(105		)	(151		)	(97		)
Net premiums	$	134		$	133		$	127		$	125		$	119		$	119

The insurance premiums earned, net of amounts ceded, with related parties were $90 million, $75 million, and $64 million for the years ended December 31, 2015, 2014, and 2013, respectively. The amount of unearned insurance premiums ceded to related parties were $176 million and $149 million at December 31, 2015 and 2014, respectively.

Commissions on reinsurance ceded are earned on the same basis as related premiums. Reinsurance contracts do not relieve TARIC from its obligations to its policyholders. Failure of reinsurers to honor their obligations could result in losses to TARIC. Therefore, TARIC either directly or indirectly (via insurance brokers) monitors the underlying business and financial performance of the reinsurers. In addition, where deemed necessary, TARIC may require collateral or utilize multiple reinsurers to mitigate concentration risk.