Annual Report 2005 - Chubb Group of Insurance Companies

alance sheets and superior underwriting ability, and we monitor the Ñnancial strength of our
reinsurers on an ongoing basis. Nevertheless, in recent years, certain of our reinsurers have experienced
Ñnancial diÇculties or exited the reinsurance business. In addition, we may become involved in
coverage disputes with our reinsurers. A provision for estimated uncollectible reinsurance is recorded
based on an evaluation of balances due from reinsurers, changes in the credit standing of the
reinsurers, coverage disputes and other relevant factors.
Prior Year Loss Development
Because loss reserve estimates are subject to the outcome of future events, changes in estimates
are unavoidable given that loss trends vary and time is required for changes in trends to be recognized
and conÑrmed. Reserve changes that increase previous estimates of ultimate cost are referred to as
unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous
estimates of ultimate cost are referred to as favorable development or reserve releases.
A reconciliation of our beginning and ending loss reserves, net of reinsurance, for the three years
ended December 31, 2005 is as follows:
2005 2004 2003
(in millions)
Net loss reserves, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $16,809 $14,521 $12,642
Net incurred losses and loss expenses related to
Current yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,651 6,994 6,470
Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 163 327 397
7,814 7,321 6,867
Net payments for losses and loss expenses related to
Current yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,879 1,691 1,589
Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,031 3,342 3,399
5,910 5,033 4,988
Net loss reserves, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,713 $16,809 $14,521
During 2005, we experienced overall unfavorable prior year development of $163 million, which
represented 1.0% of the net loss reserves as of December 31, 2004. This compares with unfavorable
prior year development of $327 million during 2004, which represented 2.3% of the net loss reserves at
December 31, 2003, and $397 million during 2003, which represented 3.1% of the net loss reserves at
December 31, 2002. Such adverse development was reÖected in operating results in these respective
years.
The net unfavorable development of $163 million in 2005 was due to various factors. The most
signiÑcant were:
‚We experienced net adverse development of about $200 million in the professional liability
classes other than Ñdelity. Adverse development related to accident years 1998 through 2002,
due largely to errors and omissions liability claims related to corporate failures and allegations
of management misconduct and accounting irregularities, was oÅset in part by favorable
development related to accident years 2003 and 2004.
‚We experienced adverse development of about $175 million related to accident years prior to
1996, including $35 million related to asbestos claims. The adverse development was due largely
to our strengthening loss reserves for commercial excess/umbrella and other commercial
liability classes. There was signiÑcant reported loss activity during 2005 related to these older
accident years, which caused us to extend the expected loss emergence period for these classes.
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