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Claim and Claim Adjustment Expense Reserves and Future Policy Benefit Reserves | 9 Months Ended
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Sep. 30, 2022
Liability for Claims and Claims Adjustment Expense [Abstract] |
Claim and Claim Adjustment Expense Reserves and Future Policy Benefit Reserves | Claim and Claim Adjustment Expense Reserves and Future Policy Benefit Reserves 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 historical patterns such as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions and 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 our results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $114 million and $171 million for the three and nine months ended September 30, 2022 primarily related to severe weather related events. Catastrophe losses for the three and nine months ended September 30, 2022 included $87 million for Hurricane Ian. The Company reported catastrophe losses, net of reinsurance, of $178 million and $357 million for the three and nine months ended September 30, 2021. Catastrophe losses for the three months ended September 30, 2021 included $114 million for Hurricane Ida. Catastrophe losses for the nine months ended September 30, 2021 were driven by severe weather related events, primarily Hurricane Ida and Winter Storms Uri and Viola. Liability for Unpaid Claim and Claim Adjustment Expenses 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) | 2022 |  | 2021
Reserves, beginning of year: |  |  |
Gross | $ | 24,174 |  |  | $ | 22,706 |
Ceded | 4,969 |  |  | 4,005 |
Net reserves, beginning of year | 19,205 |  |  | 18,701 |
Reduction of net reserves due to Excess Workers' Compensation Loss Portfolio Transfer | — |  |  | (632) |
Net incurred claim and claim adjustment expenses: |  |  |
Provision for insured events of current year | 4,638 |  |  | 4,474 |
Increase (decrease) in provision for insured events of prior years | (144) |  |  | (130) |
Amortization of discount | 131 |  |  | 137 |
Total net incurred (1) | 4,625 |  |  | 4,481 |
Net payments attributable to: |  |  |
Current year events | (523) |  |  | (629) |
Prior year events | (3,371) |  |  | (2,874) |
Total net payments | (3,894) |  |  | (3,503) |
Foreign currency translation adjustment and other | (383) |  |  | (51) |
Net reserves, end of period | 19,553 |  |  | 18,996 |
Ceded reserves, end of period | 5,147 |  |  | 4,836 |
Gross reserves, end of period | $ | 24,700 |  |  | $ | 23,832 |
(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, the loss on the Excess Workers' Compensation Loss Portfolio Transfer, uncollectible reinsurance 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) | 2022 |  | 2021 |  | 2022 |  | 2021
Pretax (favorable) unfavorable development: |  |  |  |  |  |  |
Specialty | $ | (15) |  |  | $ | (15) |  |  | $ | (35) |  |  | $ | (40) |
Commercial | (2) |  |  | 2 |  |  | (26) |  |  | 2 |
International | — |  |  | 3 |  |  | (5) |  |  | 2 |
Corporate & Other | — |  |  | — |  |  | 64 |  |  | 40 |
Total pretax (favorable) unfavorable development | $ | (17) |  |  | $ | (10) |  |  | $ | (2) |  |  | $ | 4 |
Unfavorable development of $64 million was recorded within the Corporate & Other segment for the nine months ended September 30, 2022 largely associated with legacy mass tort abuse claims, including the recent Diocese of Rochester proposed settlement. Unfavorable development of $40 million was recorded within the Corporate & Other segment for the nine months ended September 30, 2021 due to legacy mass tort exposures, primarily related to abuse. 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) | 2022 |  | 2021 |  | 2022 |  | 2021
Pretax (favorable) unfavorable development: |  |  |  |  |  |  |
Medical Professional Liability | $ | 8 |  |  | $ | 8 |  |  | $ | 17 |  |  | $ | 16 |
Other Professional Liability and Management Liability | 9 |  |  | — |  |  | 22 |  |  | 10 |
Surety | (20) |  |  | (15) |  |  | (48) |  |  | (53) |
Warranty | (13) |  |  | (6) |  |  | (22) |  |  | (14) |
Other | 1 |  |  | (2) |  |  | (4) |  |  | 1 |
Total pretax (favorable) unfavorable development | $ | (15) |  |  | $ | (15) |  |  | $ | (35) |  |  | $ | (40) |
Three Months 2022 Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years. Favorable development in warranty was due to lower than expected loss emergence in a recent accident year. 2021 Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years. Nine Months 2022 Unfavorable development in medical professional liability was due to higher than expected large loss activity in recent accident years. Unfavorable development in other professional liability and management liability was due to higher than expected claim severity and frequency in the Company’s cyber and professional errors and omissions businesses in multiple accident years. Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years. Favorable development in warranty was due to lower than expected loss emergence in a recent accident year. 2021 Unfavorable development in medical professional liability was due to higher than expected frequency of large losses in recent accident years. Unfavorable development in other professional liability and management liability was due to higher than expected claim severity and frequency in the Company’s cyber business in recent accident years. Favorable development in surety was primarily due to lower than expected frequency and lack of systemic activity in recent accident years. Favorable development in warranty was due to lower than expected loss emergence in a recent accident year. 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) | 2022 |  | 2021 |  | 2022 |  | 2021
Pretax (favorable) unfavorable development: |  |  |  |  |  |  |
Commercial Auto | $ | — |  |  | $ | — |  |  | $ | 21 |  |  | $ | 30 |
General Liability | — |  |  | — |  |  | 41 |  |  | — |
Workers' Compensation | (2) |  |  | 2 |  |  | (86) |  |  | (40) |
Property and Other | — |  |  | — |  |  | (2) |  |  | 12 |
Total pretax (favorable) unfavorable development | $ | (2) |  |  | $ | 2 |  |  | $ | (26) |  |  | $ | 2 |
Nine Months 2022 Unfavorable development in commercial auto was due to higher than expected claim severity in the Company’s construction business in multiple accident years. Unfavorable development in general liability was due to higher than expected claim severity in construction, middle market and small business across multiple accident years. Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years. 2021 Unfavorable development in commercial auto was due to higher than expected claim severity in the Company’s construction and middle market businesses in recent accident years. Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years. Unfavorable development in property and other was primarily due to higher than expected large loss activity in the Company’s marine business in multiple accident years. 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) | 2022 |  | 2021 (1) |  | 2022 |  | 2021 (1)
Pretax (favorable) unfavorable development: |  |  |  |  |  |  |
Commercial | $ | — |  |  | $ | (21) |  |  | $ | (4) |  |  | $ | (24) |
Specialty | — |  |  | 23 |  |  | (1) |  |  | 25 |
Other | — |  |  | 1 |  |  | — |  |  | 1 |
Total pretax (favorable) unfavorable development | $ | — |  |  | $ | 3 |  |  | $ | (5) |  |  | $ | 2 |
(1) Effective December 31, 2021 the International lines of business were consolidated to align with domestic operations. Prior period information has been conformed to the new line of business presentation. Three Months 2021 Favorable development in commercial was due to lower than expected loss emergence across multiple accident years. Unfavorable development in specialty was due to higher than expected claim severity in the Company’s medical treatment business. Nine Months 2021 Favorable development in commercial was due to lower than expected loss emergence across multiple accident years. Unfavorable development in specialty was due to higher than expected claim severity in the Company’s medical treatment business. Asbestos & Environmental Pollution (A&EP) Reserves In 2010, Continental Casualty Company (CCC) together with several of the Company’s 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 on the Condensed Consolidated Statements of Operations. The impact of the LPT on the Condensed Consolidated Statements of Operations was the recognition of a retroactive reinsurance benefit of $17 million and $8 million for the three months ended September 30, 2022 and 2021 and $40 million and $30 million for the nine months ended September 30, 2022 and 2021. As of September 30, 2022 and December 31, 2021, the cumulative amounts ceded under the LPT were $3.4 billion. The unrecognized deferred retroactive reinsurance benefit was $389 million and $429 million as of September 30, 2022 and December 31, 2021 and is included within Other liabilities on the Condensed Consolidated Balance Sheets. NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $2.3 billion as of September 30, 2022. 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 majority of the Company’s A&EP claims. Credit Risk for Ceded Reserves The majority of the Company’s outstanding voluntary reinsurance receivables are due from reinsurers with financial strength ratings of A- or higher. Receivables due from reinsurers with lower financial strength ratings are primarily due from captive reinsurers and are backed by collateral arrangements. Life & Group Policyholder Reserves The Company’s Life & Group segment includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and the Company has the ability to increase policy premiums, subject to state regulatory approval. The Company maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for the Life & Group segment. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for long term care policies, the Company’s actuaries perform a detailed claim reserve review on an annual basis. The review analyzes the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations. In developing the claim and claim adjustment expense reserve estimates for structured settlement obligations, the Company's actuaries review mortality experience on an annual basis. The Company’s recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent reviews. The Company's most recent annual claim reserve reviews were completed in the third quarter of 2022. The long term care claim reserve review resulted in a $25 million pretax reduction in reserves driven by a $107 million favorable impact from the release of all remaining IBNR reserves established during 2020 and 2021 in response to the COVID-19 pandemic partially offset by an $82 million unfavorable impact from higher claim severity, including utilization and cost of care inflation, than anticipated in the reserve estimates. The structured settlement claim reserve review resulted in a $5 million pretax reduction in reserves due to discount rate assumption changes. The Company's 2021 annual claim reserve reviews were completed in the third quarter of 2021 resulting in a $40 million pretax reduction in long term care reserves primarily due to lower claim severity than anticipated in the reserve estimates and a $2 million pretax increase in the structured settlement claim reserves primarily due to lower discount rate assumptions and mortality assumption changes. Future policy benefit reserves consist of active life reserves related to the Company’s long term care policies for policyholders that are not currently receiving benefits and represent the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk. The actuarial assumptions that management believes are subject to the most variability are morbidity, persistency, discount rates and anticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by policy lapses, benefit reductions and death. Discount rates are influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility and may also be affected by changes to the Internal Revenue Code. Future premium rate increases are generally subject to regulatory approval, and therefore the exact timing and size of the approved rate increases are unknown. As a result of this variability, the Company’s long term care reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations. Annually, in the third quarter, management assesses the adequacy of its long term care future policy benefit reserves by performing a gross premium valuation (GPV) to determine if there is a premium deficiency. Under the GPV, management estimates required reserves using best estimate assumptions as of the date of the assessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded reserves. If the GPV required reserves are greater than the existing recorded reserves, the existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in the Company’s results of operations in the period in which the need for such adjustment is determined. If the GPV required reserves are less than the existing recorded reserves, assumptions remain locked in and no adjustment is made.The GPV for the long term care future policy benefit reserves, performed in the third quarters of 2022 and 2021, indicated recorded reserves included a pretax margin of approximately $125 million and $72 million as of September 30, 2022 and 2021.

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- Definition The entire disclosure for liabilities related to future policy benefits and unpaid claims and claim adjustments. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -URI https://asc.fasb.org/subtopic&trid=2560295 + Details
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