Annual Report 2005 - Chubb Group of Insurance Companies

variety of factors. Second, diÅerent courts have addressed liability and coverage issues regarding
pollution claims and have reached inconsistent conclusions in their interpretation of several issues.
These signiÑcant uncertainties are not likely to be resolved deÑnitively in the near future.
Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired on
December 31, 1995 and has not been re-enacted. Federal legislation appears to be at a standstill. At this
time, it is not possible to predict the direction that any reforms may take, when they may occur or the
eÅect that any changes may have on the insurance industry.
Without federal movement on Superfund reform, the enforcement of Superfund liability is
shifting to the states. States are being forced to reconsider state-level cleanup statutes and regulations.
As individual states move forward, the potential for conÖicting state regulation becomes greater. In a
few states, we are seeing cases brought against insureds or directly against insurance companies for
environmental pollution and natural resources damages. To date, only a few natural resource claims
have been Ñled and they are being vigorously defended. SigniÑcant uncertainty remains as to the cost
of remediating the state sites. Because of the large number of state sites, such sites could prove even
more costly in the aggregate than Superfund sites.
In establishing our toxic waste reserves, we evaluate the exposure presented by each insured. As
part of this evaluation, we consider a variety of factors including: the probable liability, available
insurance coverage, judicial interpretations, past settlement values of similar exposures as well as facts
that are unique to each insured.
Uncertainty remains as to our ultimate liability relating to toxic waste claims. However, toxic
waste losses appear to be developing as expected due to relatively stable claim trends. In many cases,
claims are being settled for less than initially anticipated due to more eÇcient site remediation eÅorts.
In other cases, we have been successful at buying back our policies.
The following table presents a reconciliation of our beginning and ending loss reserves, net of
reinsurance recoverable, related to toxic waste claims. There are virtually no reinsurance recoveries
related to these claims.
Years Ended December 31
2005 2004 2003
(in millions)
Reserves, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $208 $226 $249
Incurred losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì
Losses paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 18 23
Reserves, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $191 $208 $226
Of the net toxic waste loss reserves at December 31, 2005 $64 million was for IBNR losses.
Reinsurance Recoverable. Reinsurance recoverable is the estimated amount recoverable from
reinsurers related to the losses we have incurred. At December 31, 2005, reinsurance recoverable
included $396 million recoverable with respect to paid losses and loss expenses, which is included in
other assets, and $3.8 billion recoverable on unpaid losses and loss expenses.
Reinsurance recoverable on unpaid losses and loss expenses represents an estimate of the portion
of our gross loss reserves that will be recovered from reinsurers. Such reinsurance recoverable is
estimated as part of our loss reserving process using assumptions that are consistent with the
assumptions used in estimating the gross loss reserves. Consequently, the estimation of reinsurance
recoverable is subject to similar judgments and uncertainties as the estimation of gross loss reserves.
Ceded reinsurance contracts do not relieve our primary obligation to our policyholders. Consequently,
an exposure exists with respect to reinsurance recoverable to the extent that any reinsurer is
unable or unwilling to meet the obligations assumed under the reinsurance contracts. We are selective
in regard to our reinsurers, placing reinsurance with only those reinsurers with strong
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