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RESERVE FOR LOSSES AND LOSS EXPENSES
 12 Months Ended
Dec. 31, 2011
RESERVE FOR LOSSES AND LOSS EXPENSES [Abstract]  
RESERVE FOR LOSSES AND LOSS EXPENSES [Text Block]

8.       RESERVE FOR LOSSES AND LOSS EXPENSES

Our reserve for losses and loss expenses comprise the following:
        
     
 As of December 31, 2011  2010 
        
 Reserve for reported losses and loss expenses$ 3,019,372 $ 2,097,484 
 Reserve for losses incurred but not reported  5,405,673   4,934,891 
  Reserve for losses and loss expenses$ 8,425,045 $ 7,032,375 
        

The following table shows a reconciliation of our beginning and ending gross unpaid losses and loss expenses for the periods indicated:
            
     
 Year ended December 31,  2011  2010  2009 
            
 Gross reserve for losses and loss expenses, beginning of period $ 7,032,375 $ 6,564,133 $ 6,244,783 
 Less reinsurance recoverable on unpaid losses, beginning of period   (1,540,633)   (1,381,058)   (1,314,551) 
 Net reserve for losses and loss expenses, beginning of period   5,491,742   5,183,075   4,930,232 
            
 Net incurred losses and loss expenses related to:          
  Current year   2,932,513   1,990,187   1,847,044 
  Prior years   (257,461)   (313,055)   (423,172) 
     2,675,052   1,677,132   1,423,872 
 Net paid losses and loss expenses related to:          
  Current year   (509,075)   (300,293)   (271,011) 
  Prior years   (953,035)   (1,042,890)   (982,036) 
     (1,462,110)   (1,343,183)   (1,253,047) 
            
 Foreign exchange and other   (16,462)   (25,282)   82,018 
            
 Net reserve for losses and loss expenses, end of period   6,688,222   5,491,742   5,183,075 
 Reinsurance recoverable on unpaid losses, end of period   1,736,823   1,540,633   1,381,058 
  Gross reserve for losses and loss expenses, end of period $ 8,425,045 $ 7,032,375 $ 6,564,133 
            

Certain business we write is generally characterized by loss events that are low frequency and high severity in nature and this can lead to volatility in our financial results. During 2011, we recognized net losses and loss expenses of $425 million, $222 million and $66 million, respectively, in relation to the Christchurch, New Zealand earthquake (including the June aftershock), the Japanese earthquake and tsunami and the Thai flooding. During 2010, we recognized net losses and loss expenses of $138 million for the September New Zealand earthquake.

 

Our estimated net losses in relation to the catastrophe events outlined above were derived from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions. We also considered current industry insured loss estimates, market share analyses and catastrophe modeling analyses, when appropriate, in addition to the information available to date from clients, brokers and loss adjusters. Industry-wide insured loss estimates for these events, as well as our own estimates, remain subject to change as additional actual loss data becomes available.

 

Significant loss adjustment work remains ongoing in New Zealand; this increases the inherent level of management judgment required to arrive at our estimates of net losses and the associated uncertainty for each of the New Zealand events. In addition, it is expected that there will be some difficulty allocating individual losses amongst these events.

 

In addition to the factors noted for New Zealand, uncertainties associated with the Japanese earthquake and tsunami including, but not limited to, the magnitude of the event and associated damage, uncertainties about the extent and nature of damages and corresponding coverages (including business interruption and contingent business interruption coverages), the ultimate size of losses to be assumed by Japan's cooperative mutuals and limitations associated with modeled losses.

 

The proximity of the Thai flooding to our reporting date means that limited information is yet available to us, inherently increasing the amount of management judgment required to arrive at our estimate of net losses and the associated level of uncertainty. The severe flooding spanned several months and had a significant impact on the Thai economy. Due to the size, prolonged duration and complexity of the event, substantial uncertainty remains regarding total insured losses and actual losses will depend, to a great extent, on claims from contingent business interruption coverage.

 

Given the factors noted above, our actual losses for any of the New Zealand events, the Japanese earthquake and tsunami and/or the Thai flooding may ultimately differ materially from our current estimates.

 

Net loss and loss expenses incurred include net favorable prior period reserve development of $257 million, $313 million and $423 million for the years ended December 31, 2011, 2010 and 2009, respectively. Prior period reserve development arises from changes to loss estimates recognized in the current year that relate to losses incurred in previous calendar years.

The following table summarizes net favorable reserve development by segment:
           
           
  Insurance Reinsurance Total  
           
 2011$ 103,014 $ 154,447 $ 257,461 
 2010  118,336   194,719   313,055 
 2009  210,861   212,311   423,172 
           

Overall, a significant portion of the net favorable prior period reserve development in each of the last three years was generated from the property, marine, and aviation lines of our insurance segment and the property and catastrophe lines of our reinsurance segment. These lines of business, the majority of which have short tail exposures, contributed 69%, 58% and 65% of the total net favorable reserve development in 2011, 2010 and 2009, respectively. The favorable development on these lines of business primarily reflects the recognition of better than expected loss emergence, rather than explicit changes in our actuarial assumptions.

 

Approximately $105 million, $117 million and $143 million of the net favorable reserve development in 2011, 2010 and 2009, respectively, was generated from professional lines (re)insurance business. This favorable development was driven by increased incorporation of our own historical claims experience into our ultimate expected loss ratios for accident years 2007 and prior, with less weighting being given to information derived from industry benchmarks.