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Management’s Discussion (Continued)
Property and casualty losses (Continued)
BHRG (Continued)
development techniques, incurred and paid loss Bornhuetter-Ferguson techniques and frequency and severity techniques are
utilized, as well as ground-up techniques where appropriate. Additional judgments must also be employed to consider changes
in contract conditions and terms as well as the incidence of litigation or legal and regulatory change.
Our gross loss reserves related to retroactive reinsurance policies were predominately for casualty or liability losses. Our
retroactive policies relate to loss events occurring before a specified date on or before the contract date and include excess-ofloss
contracts, in which losses above a contractual retention are indemnified or contracts that indemnify all losses paid by the
counterparty after the policy effective date. We paid retroactive reinsurance losses and loss adjustment expenses of
approximately $1.3 billion in 2013. The classification “reported case reserves” has no practical analytical value with respect to
retroactive policies since the amount is often derived from reports in bulk from ceding companies, who may have inconsistent
definitions of “case reserves.” We review and establish loss reserve estimates, including estimates of IBNR reserves, in the
aggregate by contract. In 2013, we increased reserves for prior years’ retroactive reinsurance contracts by approximately $300
million, which related primarily to asbestos and environmental risks assumed.
In establishing retroactive reinsurance reserves, we often analyze historical aggregate loss payment patterns and project
losses into the future under various scenarios. The claim-tail is expected to be very long for many policies and may last several
decades. We assign judgmental probability factors to these aggregate loss payment scenarios and an expectancy outcome is
determined. We monitor claim payment activity and review ceding company reports and other information concerning the
underlying losses. Since the claim-tail is expected to be very long for such contracts, we reassess expected ultimate losses as
significant events related to the underlying losses are reported or revealed during the monitoring and review process.
BHRG’s liabilities for environmental, asbestos and latent injury losses and loss adjustment expenses were approximately
$11.9 billion at December 31, 2013 and $12.4 billion at December 31, 2012 and were concentrated within retroactive
reinsurance contracts. We paid losses of approximately $874 million in 2013 attributable to these exposures. BHRG, as a
reinsurer, does not receive consistently reliable information regarding asbestos, environmental and latent injury claims from all
ceding companies, particularly with respect to multi-line treaty or aggregate excess-of-loss policies. Periodically, we conduct a
ground-up analysis of the underlying loss data of the reinsured to make an estimate of ultimate reinsured losses. When detailed
loss information is unavailable, our estimates can only be developed by applying recent industry trends and projections to
aggregate client data. Judgments in these areas necessarily include the stability of the legal and regulatory environment under
which these claims will be adjudicated. Potential legal reform and legislation could also have a significant impact on
establishing loss reserves for mass tort claims in the future.
We currently believe that maximum losses payable under our retroactive policies will not exceed approximately $35 billion
due to the aggregate contract limits that are applicable to most of these contracts. Absent significant judicial or legislative
changes affecting asbestos, environmental or latent injury exposures, we also believe it unlikely that our reported year end gross
unpaid losses of $17.7 billion will develop upward to the maximum loss payable or downward by more than 15%.
Certain of our reinsurance contracts are expected to have a low frequency of claim occurrence combined with a potential
for high severity of claims, such as property losses from catastrophes and aviation risks related to our catastrophe and individual
risk business. Loss reserves related to catastrophe and individual risk contracts were approximately $800 million at
December 31, 2013. Estimated ultimate liabilities for prior years’ events were reduced by about $200 million in 2013, which
produced a corresponding increase in pre-tax earnings. Reserving techniques for catastrophe and individual risk contracts
generally rely more on a per-policy assessment of the ultimate cost associated with the individual loss event rather than with an
analysis of the historical development patterns of past losses. Absent litigation affecting the interpretation of coverage terms, the
expected claim-tail is relatively short and thus the estimation error in the initial reserve estimates usually emerges within 24
months after the loss event.
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