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Getting the numbers right: investors and regulators now can estimate the impact of future reserve variability on insurers' earnings.



Loss reserves, generally the largest liability on insurers' balance sheets, are the estimated cost of settling unpaid claim liabilities. Under generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records.

Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting
 and statutory accounting principles The Statutory Accounting Principles are a set of accounting rules for insurance companies set forth by the National Association of Insurance Commissioners. They are used to prepare the statutory financial statements of insurance companies. , changes in reserve estimates are recognized in the year they occur, not the year policies were issued. Adjustments can turn a profitable year into a loss or even destroy an insurer's entire capital base.

An objective process exists that can estimate the variability inherent in loss reserves. This process can identify a benchmark for what company history indicates the reserve should be. It also identifies where the carried reserves stand in relation to all possible estimates that can be calculated from historical data using the loss development method.

This process has been applied to published historical data for 11 publicly traded insurers that write substantial volumes of liability risks, allowing investors and regulators to estimate the impact of potential future reserve variability on their reported losses and, therefore, on earnings and policyholders surplus.

Publicly traded insurers must comply with both the National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is an Internal Revenue Code Section 501(c)(3) non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States.  and the Securities and Exchange Commission disclosure rules. The NAIC NAIC

See National Association of Investors Corporation (NAIC).
 disclosures are of little value to investors because the most important disclosure--the comparison between the carried reserves and the range of estimates developed by the actuary--is proprietary and not available to the public. The SEC calls for significant public disclosures on reserve variability, including sensitivity of estimates to reasonable alternative assumptions and the probability that the alternative estimates, rather than the selected estimates, will occur. Unfortunately, the probability analysis contemplated by the SEC is voluntary anal insurers generally have not provided any meaningful analyses in their 10-K filings.

Reasonable Benchmark

Although there is no perfect process that will satisfy both NAIC and SEC requirements as well as stock analysts' requirements, we describe a process that establishes a benchmark loss reserve in those situations where the company has sufficient history to apply loss development methods. This benchmark provides a reasonable estimation estimation

In mathematics, use of a function or formula to derive a solution or make a prediction. Unlike approximation, it has precise connotations. In statistics, for example, it connotes the careful selection and testing of a function called an estimator.
 of the loss reserve level, including a range of reserves and the probability the reserve level will be adequate to pay all the claims it is intended to cover.

The loss development method applies historically observed patterns of loss development, called loss development factors, to known claims to project ultimate losses for a category of business. An analyst applying the loss development method selects individual LDFs for each line of business and development period, along with a tail factor that recognizes additional development may occur in periods when no loss development history exists.

Since there are no prescribed pre·scribe  
v. pre·scribed, pre·scrib·ing, pre·scribes

v.tr.
1. To set down as a rule or guide; enjoin. See Synonyms at dictate.

2. To order the use of (a medicine or other treatment).
 actuarial ac·tu·ar·y  
n. pl. ac·tu·ar·ies
A statistician who computes insurance risks and premiums.



[Latin
 rules for selecting LDFs, the analyst usually examines the historical values that have been observed for each period and selects a period-to-period LDF LDF Local Development Framework
LDF Left Democratic Front (India)
LDF Local Distribution Frame
LDF LuraDocument Format (file extension)
LDF Low Density Fiberboard
 that most likely will represent future development. The period-to-period LDFs are then accumulated ac·cu·mu·late  
v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates

v.tr.
To gather or pile up; amass. See Synonyms at gather.

v.intr.
To mount up; increase.
 multiplicatively mul·ti·pli·ca·tive  
adj.
1. Tending to multiply or capable of multiplying or increasing.

2. Having to do with multiplication.



mul
 and multiplied mul·ti·ply 1  
v. mul·ti·plied, mul·ti·ply·ing, mul·ti·plies

v.tr.
1. To increase the amount, number, or degree of.

2. Mathematics To perform multiplication on.
 by known claims to estimate ultimate losses for each category of business and accident year. The number of LDF combinations that can be selected is staggering. For example, given 11 accident years, 11 valuations, and a single tail factor, an actuary actuary

One who calculates insurance risks and premiums. Actuaries compute the probability of the occurrence of such events as birth, marriage, illness, accidents, and death.
 can identify 6.7 octillion oc·til·lion  
n.
1. The cardinal number equal to 1027.

2. Chiefly British The cardinal number equal to 1048.



[oct(o)- + (m)illion.
 (the equivalent of 6.7 million trillion One thousand times one billion, which is 1, followed by 12 zeros, or 10 to the 12th power. See space/time.

(mathematics) trillion - In Britain, France, and Germany, 10^18 or a million cubed.

In the USA and Canada, 10^12.
 trillion) possible ultimate loss outcomes. Up until now, this large number of possibilities has precluded consideration of any process that considered all possible outcomes.

The process described in this article solves the problem of calculating so many LDFs by using an approximation algorithm (algorithm) approximation algorithm - An algorithm for an optimisation problem that generates feasible but not necessarily optimal solutions.

Unlike "heuristic", the term "approximation algorithm" often implies some proven worst or average case bound on performance.
 to produce an empirical frequency distribution for all combinations that can be produced by the loss development method. The resulting distribution is equivalent to the distribution produced if it were possible to calculate every single LDF combination for every accident year.

Unlike other models that require assumptions about the distribution of outcomes, this approximation algorithm does not require any assumptions about the shape of the distribution; it is based solely on historical loss development. By determining where a carried reserve falls on the continuum Continuum (pl. -tinua or -tinuums) can refer to:
  • Continuum (theory), anything that goes through a gradual transition from one condition, to a different condition, without any abrupt changes or "discontinuities"
 of all possibilities produced by the loss development method, an analyst can calculate the probability the carried reserve will be adequate to satisfy existing liabilities. The relationship between the carried reserve and the mean reserve of the distribution is illustrated in the "Distribution of Reserve Outcomes" chart for a sample insurer An individual or company who, through a contractual agreement, undertakes to compensate specified losses, liability, or damages incurred by another individual.

An insurer is frequently an insurance company and is also known as an underwriter.
 (below).

[GRAPHIC OMITTED]

The area under the curve represents the universe of all the estimates that can be calculated for the hypothetical Hypothetical is an adjective, meaning of or pertaining to a hypothesis. See:
  • Hypothesis
  • Hypothetical
  • Hypothetical (album)
 insurer. The range of reasonable estimates is bounded by the dotted lines; the mean of the distribution is represented by the center vertical line; and the carried reserve is represented by the solid right vertical line. Since the area to the left of the carried reserve line in this case is 77% of the area under the curve, there is a 77% probability the carried reserve will be adequate to cover all liabilities for the hypothetical company as of the evaluation date.

Application to Data

The process was applied to reported loss development data of 11 publicly traded insurance groups using Schedule P data from their 2005 Statutory Annual Statements, as consolidated by the A. M. Best Co. By applying the process to data for the period ending Dec. 31, 2005, we can obtain the type of information sought by the SEC, such as the upper and lower range of variation in the reserves and the probability the carried reserve will be adequate to satisfy existing liabilities.

The use of Schedule P data has advantages and disadvantages. The data are publicly available, reliable and detailed with respect to line of business for the most recent 10 accident years. On the other hand, Schedule P data do not provide details on accident years older than 10 years; are less refined than company data at the line-of-business level; and are net of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract.  (we selected data from Schedule P, Parts 2, 3, and 4). The amount of reinsurance, both assumed and ceded, can have a significant impact on the variability of loss reserves, and Schedule P does not contain enough data to indicate the full range of variability.

In addition, there are several other limitations:

* The analysis is based solely on historical experience and may not reflect future changes in the business or in the claims settlement environment.

* A composite result for each group is calculated by weighting the probabilities for each line of business by the means of the distributions for the individual lines. Other approaches are possible, such as creating a convolution convolution /con·vo·lu·tion/ (-loo´shun) a tortuous irregularity or elevation caused by the infolding of a structure upon itself.  distribution.

* The analysis relies solely on the most recent 10 accident-year histories. Reserve adjustments for several types of claims are frequently assigned as·sign  
tr.v. as·signed, as·sign·ing, as·signs
1. To set apart for a particular purpose; designate: assigned a day for the inspection.

2.
 to older years in Schedule E Asbestos asbestos, mineral
asbestos, common name for any of a variety of silicate minerals within the amphibole and serpentine groups that are fibrous in structure and more or less resistant to acid and fire.
 claims, for example, are commonly allocated to accident years in the 1940s, '50s and '60s.

In general, we felt that an analysis based on Schedule P data provided acceptable results. Of course, if internal data can be used that are superior to Schedule P data, then this process should be applied to the superior data.

Analysis Results

We applied the process to Schedule P data for each liability line of business of each insurer group to produce an empirical frequency distribution of all possible outcomes produced by the loss development method. We then compared the carried reserve for each line to the mean of the distribution.

A probability of adequacy for each line of business was calculated for the 1996-2005 accident years combined, by determining the percentage of all possible outcomes that were less than the carried reserve. The lines of business were weighted to arrive at a single percentage for all lines combined. We established a range of reasonableness based on the number of outcomes that fell within one standard deviation In statistics, the average amount a number varies from the average number in a series of numbers.

(statistics) standard deviation - (SD) A measure of the range of values in a set of numbers.
 from the mean. On average, this selection for the range of reasonableness accounted for 68.4% of all the possible outcomes, with 15.8% of the outcomes below the low-end low-end
adj.
1. Cheapest in a line of merchandise: low-end subcompact cars.

2. Informal Of, relating to, or intended for low-income consumers; downscale:
 of the range and 15.8% above the high-end high-end
adj. Informal
1. Appealing to sophisticated and discerning customers: a high-end department store; high-end video equipment.

2.
 of the range. Table 1 summarizes the results of the analysis.

According to according to
prep.
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

3.
 this analysis, most of the groups in Table 1 reserved at conservative levels--the carried reserves were above the mean of the empirical distributions. Only three groups in the sample--American International Group, Berkshire Hathaway Berkshire Hathaway (NYSE: BRKA, NYSE: BRKB) is a conglomerate holding company headquartered in Omaha, Nebraska, U.S., that oversees and manages a number of subsidiary companies.  and Everest Re--carried reserves below the mean of the distribution. If AIG AIG addressee indicator group (US DoD)
AIG American International Group, Inc
AiG Answers in Genesis (religious group in defense of Scripture)
AIG Artificial Intelligence Group
AIG Australian Industry Group
, Berkshire Hathaway and Everest Re (or any group in the sample, for that matter) provided internal data in more detail than Schedule P captures, we may have a different result. Also, given their substantial financial resources and the size of their capital and surplus accounts, both AIG and Berkshire Hathaway may be able to tolerate tol·er·ate
v.
1. To allow without prohibiting or opposing; permit.

2. To put up with; endure.

3. To have tolerance for a substance or pathogen.
 the higher level of risk associated with the lower probability of adequacy shown in Table 1. As of Dec. 31, 2005, AIG and Berkshire Hathaway reported combined shareholders equity of $178 billion.

Like other groups in the sample, the composite probability of adequacy figures for AIG and Berkshire Hathaway were derived by the weighting procedures previously described. A line-by-line analysis of the results for the two groups provides additional insight into the broad conclusions that can be drawn from Table 1.

For example, analysis of AIG's line of business probabilities indicates that the three lines of business with the highest probabilities of adequacy are: other liability/occurrence; products liability/claims made; and medical malpractice/claims made, with probabilities of 98%, 82% and 80%, respectively. The three lines of business with the lowest probability of adequacy are: other liability/ claims made; reinsurance liability; and workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. , with probabilities of adequacy of 9%, 6% and 2%, respectively. Performing the same analysis for Berkshire Hathaway indicates that almost all lines of business enjoy a high probability of adequacy. Only the group's other liability/occurrence and reinsurance liability lines had low probabilities of adequacy at 10% and 0.1%, respectively.

Items to Consider

It is very important to keep certain considerations in mind.

For instance, according to statutory codification The collection and systematic arrangement, usually by subject, of the laws of a state or country, or the statutory provisions, rules, and regulations that govern a specific area or subject of law or practice. , management sets loss reserves at its best estimate by considering a variety of actuarial, financial, economic and legal issues. The reserving process employed by management, including the use of critical accounting estimates, is described in the Management Discussion & Analysis section of their annual reports on SEC form 10-K Form 10-K

A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information.


Form 10-K

See 10-K.
. While management has the final word on reserves, companies are required to file a Statement of Actuarial Opinion prepared by a qualified actuary, affirming that the reserves meet the requirements of the insurance laws of the domiciliary domiciliary

pertaining to a household.


domiciliary calls
professional veterinary calls made to patients at their owners' residences. Called also house calls.
 state, were computed in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[]

As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh.
 with accepted reserving standards and make a reasonable provision for unpaid claims.

There are no generally accepted standards for establishing a range of reasonableness for reserve estimates. We used one standard deviation from the mean of the distribution, which captured, on average, 68.4% of the outcomes. Using the standard deviation recognizes the inherent variability of the reserves by line of business. The range of reasonableness produced by the standard deviation is generous--84.2% of the outcomes are below the high end of the range. Other ranges could be selected using different criteria. In their Statements of Actuarial Opinion, actuaries are required to identify the range of reasonableness selected and explain the reasoning behind their choices.

Reinsurance liability was the only line where the carried reserves were below the mean for the 11 groups as a whole. Table 2 shows the total group reserves for each liability line of business; the mean of the distribution for each line; the variance The discrepancy between what a party to a lawsuit alleges will be proved in pleadings and what the party actually proves at trial.

In Zoning law, an official permit to use property in a manner that departs from the way in which other property in the same locality
 between the mean and the carried reserve; the low end of the range of reasonableness; and the variance between the low end of the range and the carried reserve. The lines of business in the table are arranged in order of the size of the difference between the reserve and the low end of the range.

The results are not surprising. The reinsurance liability line is primarily an excess-of-loss line, often the most difficult type of loss reserves to estimate. Two of the 11 publicly traded groups, Safeco anal Cincinnati, did not report any material reinsurance liability business. Of the remaining nine groups, two (Zenith zenith, in astronomy, the point in the sky directly overhead; more precisely, it is the point at which the celestial sphere is intersected by an upward extension of a plumb line from the observer's location.  and W. R. Berkley W.R. Berkley NYSE: BER is a Fortune 500 company founded in 1967, and based in Greenwich, Connecticut. It is one of the nation’s premier commercial lines property casualty insurance providers. ) had carried reserves above the mean; two (Chubb and Everest Re) had carried reserves below the mean but within the range of reasonableness; and five (AIG, Travelers, Berkshire Hathaway, CNA (Certified NetWare Administrator) See Novell certification. , and Hartford) had carried reserves below the low end of the range. Most of the variante for reinsurance liability was attributable to Berkshire Hathaway, which accounted for more than 73% of the $6.1 billion shortfall Shortfall

The amount by which the capital required to fulfill a financial obligation exceeds available capital.

Notes:
Shortfall risk is often combated with an efficient hedging strategy created by a fund, group, institution, or individual.
 from the mean and 69% of the $5 billion shortfall from the low end of the range.

The results may be affected by one of the best insurance markets in decades. Historically, the insurance industry has fluctuated between periods of high rates and profits and periods of low rates and depressed profits. There may be a tendency for management to be particularly conservative in setting its reserves at a higher probability of adequacy in the recent period of high profitability.

Effects on Earnings

Measuring loss reserve variability is important to management, regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest
regulatory agency

administrative body, administrative unit - a unit with administrative responsibilities
 and financial analysts who assess the quality of a company's reported earnings. Publicly traded insurers have acknowledged the variability issue in SEC filings, but have not sufficiently quantified the range of variability or the probabilities associated with their reserve estimates.

Use of this process allows management to measure reserve variability and calculate the probability that the carried reserve will be adequate. The algorithm algorithm (ăl`gərĭth'əm) or algorism (–rĭz'əm) [for Al-Khowarizmi], a clearly defined procedure for obtaining the solution to a general type of problem, often numerical.  produces results that show where the carried reserves stand in relation to all possible outcomes that can be generated from the historical data using the loss development method. If management decides that future reporting and development patterns will differ from past patterns, anal makes its estimate accordingly, the algorithm calculates the probability of adequacy for the new estimate using the original pattern, thus quantifying the effect of the decision to depart from historical patterns. Management can select a different reserve, but if it does, then the process shows the magnitude of the difference attributable to management judgment--a feature that effectively requires management to demonstrate the soundness of the decision to depart from historical experience.

Senior managers can use the output produced by this process three ways. Table 3 shows the variance between the carried reserve and the mean of the distribution as a percentage of pretax pre·tax  
adj.
Existing before tax deductions: pretax income.

pretax adj [profit] → vor (Abzug der) Steuern 
 earnings.

Table 3 illustrates the sensitivity of earnings to the selection of a reserve equal to the mean of the distribution. The upper and lower ends of the range of reasonableness could also be selected as alternative estimates. Table 3 also indicates the approximate size of future additions or reductions to pretax earnings suggested by a comparison of carried reserves to historically indicated reserves. (The results in Table 3 are illustrative il·lus·tra·tive  
adj.
Acting or serving as an illustration.



il·lustra·tive·ly adv.

Adj. 1.
 only, and subject to the limitations and conditions described earlier.)

A second and related use of the results of this process is to quantify Quantify - A performance analysis tool from Pure Software.  the size of the range of reasonable variability in reserve estimates and compare it to key financial benchmarks, as illustrated in Table 4.

By comparing the size of the range to shareholders equity, investors can assess the degree of risk in their investment that is attributable solely to the potential reserve variability of the insurance group. The range as a proportion of shareholders' equity Shareholders' Equity

A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares.
 varies from a low of 4% for Berkshire Hathaway to a high of 37% for W. R. Berkley. Of course, there still is a distinct possibility that ultimate losses will fall outside the range of reasonableness.

A third application is to develop the probabilities of occurrence at the ends of the range of reasonableness. Probabilities of occurrence quantify the likelihood that the ultimate settlement value of a reserve falls outside the range of reasonableness.

The SEC has stressed the importance of this information in its release on critical accounting estimates, noting the probabilities associated with the ends of the range should be disclosed, if known or available, as part of a sensitivity analysis that demonstrates the effect of alternative assumptions on financial results.

The Bottom Line

The proposed process is not intended to set reserves per se, even though it could be used for that purpose. Reserve decisions are the prerogative An exclusive privilege. The special power or peculiar right possessed by an official by virtue of his or her office. In English Law, a discretionary power that exceeds and is unaffected by any other power; the special preeminence that the monarch has over and above all others,  of management, which is free to consider a variety of factors in setting reserves.

Absent a material and quantifiable Quantifiable
Can be expressed as a number. The results of quantifiable psychological tests can be translated into numerical values, or scores.

Mentioned in: Psychological Tests
 change in risk factors, however, historical data should play a predominant pre·dom·i·nant  
adj.
1. Having greatest ascendancy, importance, influence, authority, or force. See Synonyms at dominant.

2.
 role in the reserve-setting process. Departures from historically indicated reserves should be supported by an analysis that quantifies the effect of specific changes on future loss development. The process provides a framework for performing this type of analysis.

In addition to providing the quantitative disclosures called for by the SEC, the process can be used on at least two other fronts--responding to examinations by state insurance regulators on the one hand, and by tax authorities on the other. These agencies have concurrent jurisdiction The authority of several different courts, each of which is authorized to entertain and decide cases dealing with the same subject matter.

State and federal courts possess concurrent jurisdiction over particular civil lawsuits, such as an action to declare a state law
 over the loss-reserving practices of insurers, but have opposing interests.

State regulators are charged with ensuring solvency The ability of an individual to pay his or her debts as they mature in the normal and ordinary course of business, or the financial condition of owning property of sufficient value to discharge all of one's debts.


solvency n.
 of insurers for the protection of consumers, and thus are concerned when management appears to be lowering its reserves in favor of upon the side of; favorable to; for the advantage of.

See also: favor
 higher profits. The Internal Revenue Service, in contrast, is concerned with tax avoidance The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income.

Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal
 and will closely scrutinize scru·ti·nize  
tr.v. scru·ti·nized, scru·ti·niz·ing, scru·ti·niz·es
To examine or observe with great care; inspect critically.



scru
 loss reserve levels that appear excessive. The process allows management to respond to these conflicting regulatory interests by documenting the reasonableness of their reserving levels based on historical data.

Future applications of the process may determine whether the generally conservative reserving levels observed as of Dec. 31, 2005, were the result of a consistent approach to reserving or a temporary reaction to one of the best insurance markets in decades. The relationship between insurance cycles and reserve levels has been the subject of much commentary and speculation, but apart from anectdotal evidence, there has been no systematic study of the issue. Future applications of the process will shed additional light on the subject.

* The Situation: Adjusting reserve estimates can move profits into the loss column.

* The Significance: Measuring loss reserve variability is important to regulators anal financial analysts who assess the quality of a company's earnings.

* What Happened: An algorithm was developed that can determine the probability that a carried reserve will be adequate to satisfy existing liabilities.

(The authors are members of the Reserve Study Group, a not-for-profit corporation A not-for-profit corporation is a corporation created by statute, government or judicial authority that is not intended to provide a profit to the owners or members. A corporation that is organized to provide profits to its owners or members is a for-profit corporation.  dedicated to the study of loss reserving issues.)

Contributors: C K. Stan STAN Stanchion
STAN Stärke- und Ausrüstungsnachweis (German)
Stan Standard Man (human patient simulator)
STAN SEMCIP Technical Assistance Network
STAN System Trace Audit Number
STAN Star Trek Area Network
 Khury is a principal with Bass & Khury, and may be reached at CKStanKhury@aol.com. Charles A. Bryan is president of CAB Consulting, and may be reached at ChuckBryan66@hotmail.com.
Table 1
Loss Reserve Variability, Schedule P Liability Lines
Of Business for 1996-2005 Accident Years

As of Dec. 31, 2005
($ Millions)

                      Carried   % of Total   Prob. of
Insurance Group      Reserves     Reserves   Adequacy

AIG                    35,840         84.4       31.6
Travelers              25,041         86.9       79.4
Berkshire Hathaway     18,906         76.3       33.8
Chubb                  12,669         91.4       92.3
CNA                    12,427         87.6       57.5
Hartford               10,587         96.0       71.8
W. R. Berkley           5,597         98.6       72.1
Safeco                  3,508         90.1       70.0
Cincinnati              2,667         94.8       93.9
Everest Re              2,594         72.4       44.0
Zenith                  1,137         89.4       99.9

                           Range of Reasonableness

Insurance Group          Low         Mean       High

AIG                    33,048       38,367     43,686
Travelers              22,619       23,682     24,749
Berkshire Hathaway     19,980       21,669     23,360
Chubb                   9,560       10,570     11,577
CNA                    11,159       12,165     13,171
Hartford                8,894        9,337      9,779
W. R. Berkley           4,706        5,187      5,668
Safeco                  3,248        3,408      3,569
Cincinnati              1,996        2,134      2,303
Everest Re              2,489        2,953      3,419
Zenith                    867          922        977

Table 2
Variability by Line of Business

All groups combined, 1996-2005 accident years.

As of Dec. 31, 2005
($ Millions)

                            Carried               Reserve
Line of Business            Reserve        Mean    --Mean

Other Liability (Occ)        26,070      22,036     4,034
Workers' Compensation        30,482      28,583     1,899
Other Liability (CM)         21,609      20,493     1,116
Medical Malpractice (CM)      3,904       2,702     1,202
Private Passenger Auto       12,927      12,143       784
Commercial Auto               7,823       7,236       587
Commercial Multiperil        12,698      12,485       213
Medical Malpractice (Occ)     1,332       1,078       254
Products Liability (CM)         447         369        78
Products Liability (Occ)      3,408       3,469       -61
Reinsurance Liability        15,472      21,619    -6,147

                                Low     Reserve
Line of Business                End   --Low End

Other Liability (Occ)        20,996       5,074
Workers' Compensation        27,922       2,560
Other Liability (CM)         19,129       2,480
Medical Malpractice (CM)      2,546       1,358
Private Passenger Auto       11,886       1,041
Commercial Auto               7,059         764
Commercial Multiperil        12,200         498
Medical Malpractice (Occ)     1,025         307
Products Liability (CM)         261         186
Products Liability (Occ)      3,340          68
Reinsurance Liability        20,507      -5,035

Table 3
Impact on Earnings

The effect of the variability observed in Table 1 on pretax earnings,
1996-2005 accident years.

As of Dec. 31, 2005
($ Millions)

                      Carried         Mean of   Reserve
Insurance Group       Reserve    Distribution      Mean

AIG                    35,840          38,367    -2,527
Travelers              25,041          23,682     1,359
Berkshire Hathaway     18,906          21,669    -2,763
Chubb                  12,669          10,570     2,099
CNA                    10,587           9,337     1,250
Hartford               12,427          12,165       262
W. R. Berkley           3,508           3,408       100
Safeco                  5,597           5,187       410
Cincinnati              2,667           2,134       533
Everest Re              2,594           2,953      -359
Zenith                  1,137             922       215

                       Pretax      Difference
Insurance Group      Earnings   As % Earnings

AIG                    15,213         -16.60%
Travelers               2,671          50.90%
Berkshire Hathaway     12,791         -21.60%
Chubb                   2,447          85.80%
CNA                     2,985          41.90%
Hartford                  162         161.70%
W. R. Berkley             986          10.10%
Safeco                    771          53.20%
Cincinnati               -281             --
Everest Re                823         -43.60%
Zenith                    238          90.30%

Table 4
Range of Variability

Comparing the size of the range of reasonableness to shareholders
equity, 1996-2005 accident years.
As of Dec. 31, 2005
($ Millions)

                       Range of Reasonableness   Size of Shareholders

Insurance Group          High-End    Low-End        Range    Equity

AIG                        43,686     33,048        10,638   86,317
Travelers                  24,749     22,619         2,130   22,303
Berkshire Hathaway         23,360     19,980         3,380   91,484
Chubb                      11,577      9,560         2,017   12,407
Hartford                   19,779      8,894           885   15,325
CNA                        13,171     11,159         2,012    8,950
Safeco                      3,569      3,248           321    4,125
W. R. Berkley               5,668      4,706           962    2,567
Cincinnati                  2,303      1,966           337    6,086
Everest Re                  3,419      2,489           930    4,140
Zenith                        977        867           110      713
COPYRIGHT 2007 A.M. Best Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Property/Casualty: Reserves
Author:Khury, C.K. Stan; Bryan, Charles A.
Publication:Best's Review
Date:Oct 1, 2007
Words:3739
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