Reserve for Losses and Loss Adjustment Expenses

The reserve for losses is established based on estimates of individual claims and actuarially determined estimates of future losses based on ProAssurance’s past loss experience, available industry data and projections as to future claims frequency, severity, inflationary trends and settlement patterns. Estimating the reserve, particularly the reserve appropriate for liability exposures, is a complex process. Claims may be resolved over an extended period of time, often five years or more, and may be subject to litigation. Estimating losses requires ProAssurance to make and revise judgments and assessments regarding multiple uncertainties over an extended period of time. As a result, the reserve estimate may vary significantly from the eventual outcome. The assumptions used in establishing ProAssurance’s reserve are regularly reviewed and updated by management as new data becomes available. Changes to estimates of previously established reserves are included in earnings in the period in which the estimate is changed.

ProAssurance believes that the methods it uses to establish reserves are reasonable and appropriate. Each year, ProAssurance uses internal actuaries to review the reserve for losses of each insurance subsidiary. ProAssurance also engages consulting actuaries to review ProAssurance claims data and provide observations regarding cost trends, rate adequacy and ultimate loss costs. ProAssurance considers the views of the actuaries as well as other factors, such as known, anticipated or estimated changes in frequency and severity of claims and loss retention levels and premium rates, in establishing the amount of its reserve for losses. The statutory filings of each insurance company with the insurance regulators must be accompanied by a consulting actuary's certification as to their respective reserves.

Activity in the reserve for losses and loss adjustment expenses is summarized as follows:



(In thousands)	2015			2014			2013
Balance, beginning of year	$	2,058,266		$	2,072,822		$	2,054,994
Less reinsurance recoverables on unpaid losses and loss adjustment expenses	237,966			247,518			191,645
Net balance, beginning of year	1,820,300			1,825,304			1,863,349
Net reserves acquired from acquisitions	—			139,549			126,007
Net losses:
Current year	571,891			545,168			447,510
Favorable development of reserves established in prior years, net	(161,180		)	(182,084		)	(222,749		)
Total	410,711			363,084			224,761
Paid related to:
Current year	(84,186		)	(93,737		)	(43,616		)
Prior years	(390,849		)	(413,900		)	(345,197		)
Total paid	(475,035		)	(507,637		)	(388,813		)
Net balance, end of year	1,755,976			1,820,300			1,825,304
Plus reinsurance recoverables on unpaid losses and loss adjustment expenses	249,350			237,966			247,518
Balance, end of year	$	2,005,326		$	2,058,266		$	2,072,822

As discussed in Note 1, estimating liability reserves is complex and requires the use of many assumptions. As time passes and ultimate losses for prior years are either known or become subject to a more precise estimation, ProAssurance increases or decreases the reserve estimates established in prior periods. The favorable loss development recognized in 2015 primarily reflects a lower than anticipated claims severity trend (i.e. the average size of a claim) for accident years 2008 through 2012. The favorable development recognized in 2014 and 2013 was primarily due to lower than anticipated claims severity trends for accident years 2007 through 2011 and accident years 2005 through 2011, respectively.