

Note 8	Reserve for Property and Casualty Insurance Claims and Claims Expense

The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.

Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes and reserves and reinsurance recoverables for Discontinued Lines and Coverages, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property and casualty insurance claims and claims expense in the Consolidated Statements of Operations in the period such changes are determined.



Rollforward of reserve for property and casualty insurance claims and claims expense
($ in millions)	2017			2016			2015
Balance as of January 1	$	25,250		$	23,869		$	22,923
Less reinsurance recoverables	6,184			5,892			5,694
Net balance as of January 1	19,066			17,977			17,229
SquareTrade acquisition as of January 3, 2017	17			—			—
Incurred claims and claims expense related to:
Current year	22,432			22,238			20,953
Prior years	(503		)	(17		)	81
Total incurred	21,929			22,221			21,034
Claims and claims expense paid related to:
Current year	14,194			14,222			13,660
Prior years	6,964			6,910			6,626
Total paid	21,158			21,132			20,286
Net balance as of December 31	19,854			19,066			17,977
Plus reinsurance recoverables	6,471			6,184			5,892
Balance as of December 31	$	26,325		$	25,250		$	23,869

Incurred claims and claims expense represents the sum of paid losses and reserve changes in the calendar year. This expense includes losses from catastrophes of $3.23 billion, $2.57 billion and $1.72 billion in 2017, 2016 and 2015, respectively, net of reinsurance and other recoveries (see Note 10). Catastrophes are an inherent risk of the property and casualty insurance business that have contributed to, and will continue to contribute to, material year-to-year fluctuations in the Company’s results of operations and financial position.

The Company calculates and records a single best reserve estimate for losses from catastrophes, in conformance with generally accepted actuarial standards. As a result, management believes that no other estimate is better than the recorded amount. Due to the uncertainties involved, including the factors described above, the ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. Accordingly, management believes that it is not practical to develop a meaningful range for any such changes in losses incurred.

During 2017, incurred claims and claims expense related to prior years was primarily comprised of net decreases in auto and homeowners reserves of $490 million and $131 million, respectively, primarily related to a reduction in claim severity estimates for liability coverages, net increases in Discontinued Lines and Coverages of $96 million and net increases in other reserves of $22 million. Incurred claims and claims expense includes favorable catastrophe loss reestimates of $18 million, net of reinsurance and other recoveries.

During 2016, incurred claims and claims expense related to prior years was primarily composed of net decreases in auto reserves of $155 million primarily due to claim severity development for bodily injury coverage that was better than expected, net decreases in homeowners reserves of $24 million due to favorable non-catastrophe reserve reestimates, net increases in other reserves of $57 million primarily due to unfavorable commercial business non-catastrophe losses, and net increases in Discontinued Lines and Coverages reserves of $105 million. Incurred claims and claims expense includes unfavorable catastrophe loss reestimates of $6 million, net of reinsurance and other recoveries.

During 2015, incurred claims and claims expense related to prior years was primarily composed of net increases in auto reserves of $30 million primarily due to claim severity development for bodily injury coverage that was more than expected and litigation settlements, net decreases in homeowners reserves of $24 million due to favorable non-catastrophe reserve reestimates, net increases in other reserves of $22 million, and net increases in Discontinued Lines and Coverages reserves of $53 million. Incurred claims and claims expense includes favorable catastrophe loss reestimates of $15 million, net of reinsurance and other recoveries.

The following presents information about incurred and paid claims development as of December 31, 2017, net of reinsurance, as well as the cumulative number of reported claims and the total of IBNR reserves plus expected development on reported claims included in the net incurred claims amounts. See Note 2 for the accounting policy and methodology for determining reserves for claims and claims expense, including both reported and IBNR claims. The cumulative number of reported claims is identified by coverage and excludes reported claims for industry pools and facilities where information is not available. The information about incurred and paid claims development for the 2013 to 2017 years, and the average annual percentage payout of incurred claims by age as of December 31, 2017, is presented as required supplementary information.

Auto insurance – liability coverage



($ in millions, except number of reported claims)	Incurred claims and allocated claim adjustment expenses, net of reinsurance										IBNR reserves plus expected development on reported claims		Cumulative number of reported claims
	For the years ended December 31,										As of December 31, 2017
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2013		2014		2015		2016		2017
2013	$	7,461	$	7,429	$	7,446	$	7,387	$	7,317	$	513	2,114,149
2014	—		7,889		7,955		7,882		7,785		951		2,194,476
2015	—		—		8,896		8,816		8,721		1,828		2,380,096
2016	—		—		—		9,169		8,926		3,149		2,387,023
2017	—		—		—		—		8,621		5,465		2,112,379
							Total		$	41,370

	Cumulative paid claims and allocated claims adjustment expenses, net of reinsurance
	For the years ended December 31,
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2013		2014		2015		2016		2017
2013	$	2,955	$	4,993	$	5,946	$	6,493	$	6,804
2014	—		3,177		5,322		6,265		6,834
2015	—		—		3,529		5,846		6,893
2016	—		—		—		3,491		5,777
2017	—		—		—		—		3,156
							Total		$	29,464
All outstanding liabilities before 2013, net of reinsurance									1,275
Liabilities for claims and claim adjustment expenses, net of reinsurance									$	13,181



Average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2017
	1 year		2 years		3 years		4 years		5 years
Auto insurance – liability coverage	40.2	%	27.4	%	12.5	%	8.0	%	4.7	%

Auto insurance – physical damage coverage



($ in millions, except number of reported claims)	Incurred claims and allocated claim adjustment expenses, net of reinsurance										IBNR reserves plus expected development on reported claims		Cumulative number of reported claims
	For the years ended December 31,										As of December 31, 2017
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2013		2014		2015		2016		2017
2013	$	3,894	$	3,866	$	3,854	$	3,844	$	3,842	$	1	3,777,287
2014	—		4,308		4,296		4,270		4,273		3		4,144,310
2015	—		—		4,663		4,688		4,676		11		4,388,829
2016	—		—		—		5,136		5,058		19		4,426,714
2017	—		—		—		—		5,131		278		4,075,755
							Total		$	22,980

	Cumulative paid claims and allocated claims adjustment expenses, net of reinsurance
	For the years ended December 31,
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2013		2014		2015		2016		2017
2013	$	3,718	$	3,848	$	3,841	$	3,841	$	3,841
2014	—		4,148		4,281		4,273		4,270
2015	—		—		4,513		4,679		4,665
2016	—		—		—		4,895		5,039
2017	—		—		—		—		4,853
							Total		$	22,668
All outstanding liabilities before 2013, net of reinsurance									9
Liabilities for claims and claim adjustment expenses, net of reinsurance									$	321



Average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2017
	1 year		2 years		3 years		4 years		5 years
Auto insurance – physical damage coverage	96.6	%	3.2	%	(0.2	)%	—	%	—	%

Homeowners insurance



($ in millions, except number of reported claims)	Incurred claims and allocated claim adjustment expenses, net of reinsurance										IBNR reserves plus expected development on reported claims		Cumulative number of reported claims
	For the years ended December 31,										As of December 31, 2017
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2013		2014		2015		2016		2017
2013	$	3,098	$	3,170	$	3,163	$	3,142	$	3,121	$	51	682,873
2014	—		3,608		3,651		3,653		3,621		88		765,001
2015	—		—		3,572		3,622		3,560		158		720,102
2016	—		—		—		3,972		4,001		319		809,045
2017	—		—		—		—		4,490		1,260		840,254
							Total		$	18,793

	Cumulative paid claims and allocated claims adjustment expenses, net of reinsurance
	For the years ended December 31,
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2013		2014		2015		2016		2017
2013	$	2,288	$	2,885	$	2,998	$	3,045	$	3,070
2014	—		2,736		3,365		3,481		3,533
2015	—		—		2,589		3,299		3,402
2016	—		—		—		2,950		3,682
2017	—		—		—		—		3,230
							Total		$	16,917
All outstanding liabilities before 2013, net of reinsurance									173
Liabilities for claims and claim adjustment expenses, net of reinsurance									$	2,049



Average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2017
	1 year		2 years		3 years		4 years		5 years
Homeowners insurance	74.6	%	18.6	%	2.9	%	1.3	%	0.7	%



Reconciliation of the net incurred and paid claims development tables above to the reserve for property and casualty insurance claims and claims expense
($ in millions)	As of December 31, 2017
Net outstanding liabilities:
Allstate Protection
Auto insurance - Liability coverage	$	13,181
Auto insurance - Physical damage coverage	321
Homeowners insurance	2,049
Other personal lines	1,311
Commercial lines	593
Service Businesses	86
Discontinued Lines and Coverages ⁽¹⁾	1,335
Unallocated loss adjustment expenses	978
Net reserve for property and casualty insurance claims and claims expense	19,854

Reinsurance recoverable:
Allstate Protection
Auto insurance - Liability coverage	5,715
Auto insurance - Physical damage coverage	—
Homeowners insurance	23
Other personal lines	214
Commercial lines	20
Service Businesses	10
Discontinued Lines and Coverages	485
Unallocated loss adjustment expenses	4
Total reinsurance recoverable	6,471
Gross reserve for property and casualty insurance claims and claims expense	$	26,325


⁽¹⁾	Discontinued Lines and Coverages includes business in run-off. All of the claims primarily relate to accident years more than 30 years ago. IBNR reserves represent $733 million of the total reserves as of December 31, 2017.

Management believes that the reserve for property and casualty insurance claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.

Allstate’s reserves for asbestos claims were $884 million and $912 million, net of reinsurance recoverables of $412 million and $444 million, as of December 31, 2017 and 2016, respectively. Reserves for environmental claims were $166 million and $179 million, net of reinsurance recoverables of $33 million and $40 million, as of December 31, 2017 and 2016, respectively. For further discussion of asbestos and environmental reserves, see Note 14.