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 considerably 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, 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.

ProAssurance partitions its reserve by accident year, which is the year in which the claim becomes its liability. As claims are incurred (reported) and claim payments are made, they are aggregated by accident year for analysis purposes. ProAssurance also partitions its reserve by reserve type: case reserves and IBNR reserves. Case reserves are established by the claims department based upon the particular circumstances of each reported claim and represent ProAssurance’s estimate of the future loss costs (often referred to as expected losses) that will be paid on reported claims. Case reserves are decremented as claim payments are made and are periodically adjusted upward or downward as estimates regarding the amount of future losses are revised; a reported loss for an individual claim equates to the case reserve at any point in time plus the claim payments that have been made to date. IBNR reserves represent an estimate, in the aggregate, of future development on losses that have been reported to ProAssurance plus an estimate of losses that have been incurred but not reported.

Development of Prior Accident Years

In addition to setting the initial reserve for the current accident year, each period ProAssurance reassesses the amount of reserve required for prior accident years. The foundation of ProAssurance’s reserve re-estimation process is an actuarial analysis that is performed by both the internal and consulting actuaries. This detailed analysis projects ultimate losses on a line of business, geographic, coverage layer and accident year basis. The procedure uses the most representative data for each partition, capturing its unique patterns of development and trends. In all, there are 219 different partitions of ProAssurance's business for purposes of this analysis. ProAssurance believes that the use of consulting actuaries provides an independent view of the loss data as well as a broader perspective on industry loss trends.

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



(In thousands)	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016			Year Ended December 31, 2016
Balance, beginning of year	$	1,993,428		$	2,005,326		$	2,005,326
Less reinsurance recoverables on unpaid losses and loss adjustment expenses	273,475			249,350			249,350
Net balance, beginning of year	1,719,953			1,755,976			1,755,976
Net reserves acquired from acquisitions	—			—			—
Net losses:
Current year	147,927			139,660			587,007
Favorable development of reserves established in prior years, net	(28,776		)	(28,705		)	(143,778		)
Total	119,151			110,955			443,229
Paid related to:
Current year	(33,085		)	(26,411		)	(96,190		)
Prior years	(80,709		)	(80,154		)	(383,062		)
Total paid	(113,794		)	(106,565		)	(479,252		)
Net balance, end of period	1,725,310			1,760,367			1,719,953
Plus reinsurance recoverables on unpaid losses and loss adjustment expenses	271,679			245,403			273,475
Balance, end of period	$	1,996,989		$	2,005,770		$	1,993,428

The favorable loss development recognized in the three months ended March 31, 2017 primarily reflected a lower than anticipated claims severity trend (i.e., the average size of a claim) for accident years 2009 through 2014. The favorable loss development recognized in the three months ended March 31, 2016 primarily reflected a lower than anticipated claims severity trend for accident years 2009 through 2013. The favorable loss development recognized in the twelve months ended December 31, 2016 primarily reflected a lower than anticipated claims severity trend for accident years 2008 through 2014.

For additional information regarding ProAssurance's reserve, see Note 1 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2016 Form 10-K.