Reserve for Property-Liability Insurance Claims and Claims Expense

The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in laws and regulations, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.

Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property-liability insurance claims and claims expense in the Consolidated Statements of Operations in the period such changes are determined.

Activity in the reserve for property-liability insurance claims and claims expense is summarized as follows:



($ in millions)	2016			2015		2014
Balance as of January 1	$	23,869		$	22,923	$	21,857
Less reinsurance recoverables	5,892			5,694		4,664
Net balance as of January 1	17,977			17,229		17,193
Incurred claims and claims expense related to:
Current year	22,238			20,953		19,512
Prior years	(17		)	81		(84		)
Total incurred	22,221			21,034		19,428
Claims and claims expense paid related to:
Current year	14,222			13,660		12,924
Prior years	6,910			6,626		6,468
Total paid	21,132			20,286		19,392
Net balance as of December 31	19,066			17,977		17,229
Plus reinsurance recoverables	6,184			5,892		5,694
Balance as of December 31	$	25,250		$	23,869	$	22,923

Incurred claims and claims expense represents the sum of paid losses and reserve changes in the calendar year. This expense includes losses from catastrophes of $2.57 billion, $1.72 billion and $1.99 billion in 2016, 2015 and 2014, respectively, net of reinsurance and other recoveries (see Note 10). Catastrophes are an inherent risk of the property-liability insurance business that have contributed to, and will continue to contribute to, material year-to-year fluctuations in the Company’s results of operations and financial position.

The Company calculates and records a single best reserve estimate for losses from catastrophes, in conformance with generally accepted actuarial standards. As a result, management believes that no other estimate is better than the recorded amount. Due to the uncertainties involved, including the factors described above, the ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. Accordingly, management believes that it is not practical to develop a meaningful range for any such changes in losses incurred.

During 2016, incurred claims and claims expense related to prior years was primarily composed of net decreases in auto reserves of $155 million primarily due to claim severity development for bodily injury coverage that was better than expected, net decreases in homeowners reserves of $24 million due to favorable non-catastrophe reserve reestimates, net increases in other reserves of $57 million primarily due to unfavorable commercial business non-catastrophe losses , and net increases in Discontinued Lines and Coverages reserves of $105 million. Incurred claims and claims expense includes unfavorable catastrophe loss reestimates of $6 million, net of reinsurance and other recoveries.

During 2015, incurred claims and claims expense related to prior years was primarily composed of net increases in auto reserves of $30 million primarily due to claim severity development for bodily injury coverage that was more than expected and litigation settlements, net decreases in homeowners reserves of $24 million due to favorable non-catastrophe reserve reestimates, net increases in other reserves of $22 million, and net increases in Discontinued Lines and Coverages reserves of $53 million. Incurred claims and claims expense includes favorable catastrophe loss reestimates of $15 million, net of reinsurance and other recoveries.

During 2014, incurred claims and claims expense related to prior years was primarily composed of net decreases in auto reserves of $238 million primarily due to claim severity development that was better than expected, net increases in homeowners reserves of $29 million due to unfavorable non-catastrophe reserve reestimates, net increases in other reserves of $13 million, and net increases in Discontinued Lines and Coverages reserves of $112 million. Incurred claims and claims expense includes unfavorable catastrophe loss reestimates of $43 million, net of reinsurance and other recoveries.

The following presents information about incurred and paid claims development as of December 31, 2016, net of reinsurance, as well as the cumulative number of reported claims and the total of IBNR reserves plus expected development on reported claims included in the net incurred claims amounts. See Note 2 for the accounting policy and methodology for determining reserves for claims and claims expense, including both reported and IBNR claims. The cumulative number of reported claims is identified by coverage and excludes reported claims for industry pools and facilities where information is not available. The information about incurred and paid claims development for the 2012 to 2015 years, and the average annual percentage payout of incurred claims by age as of December 31, 2016, is presented as required supplementary information.

Auto Insurance



($ in millions, except number of reported claims)	Incurred claims and allocated claim adjustment expenses, net of reinsurance										IBNR reserves plus expected development on reported claims		Cumulative number of reported claims
	For the years ended December 31,										As of December 31, 2016
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2012		2013		2014		2015		2016
2012	$	11,299	$	11,187	$	11,079	$	11,046	$	11,015	$	444	5,801,971
2013	—		11,329		11,269		11,273		11,204		888		5,890,375
2014	—		—		12,166		12,220		12,121		1,603		6,335,312
2015	—		—		—		13,521		13,466		2,963		6,754,829
2016	—		—		—		—		14,265		5,896		6,572,689
									$	62,071

	Cumulative paid claims and allocated claims adjustment expenses, net of reinsurance
	For the years ended December 31,
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2012		2013		2014		2015		2016
2012	$	6,818	$	8,760	$	9,660	$	10,251	$	10,571
2013	—		6,662		8,826		9,770		10,316
2014	—		—		7,312		9,586		10,518
2015	—		—		—		8,027		10,503
2016	—		—		—		—		8,369
							Total		$	50,277
All outstanding liabilities before 2012, net of reinsurance									1,167
Liabilities for claims and claim adjustment expenses, net of reinsurance									$	12,961



Average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2016
	1 year		2 years		3 years		4 years		5 years
Auto insurance	60.2	%	19.1	%	8.0	%	5.2	%	3.1	%

Homeowners Insurance



($ in millions, except number of reported claims)	Incurred claims and allocated claim adjustment expenses, net of reinsurance										IBNR reserves plus expected development on reported claims		Cumulative number of reported claims
	For the years ended December 31,										As of December 31, 2016
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2012		2013		2014		2015		2016
2012	$	3,833	$	3,915	$	3,930	$	3,913	$	3,891	$	63	1,003,156
2013	—		3,091		3,163		3,156		3,135		97		682,525
2014	—		—		3,600		3,644		3,646		172		764,101
2015	—		—		—		3,565		3,615		323		717,025
2016	—		—		—		—		3,964		1,020		755,683
									$	18,251

	Cumulative paid claims and allocated claims adjustment expenses, net of reinsurance
	For the years ended December 31,
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Accident year	2012		2013		2014		2015		2016
2012	$	2,942	$	3,606	$	3,742	$	3,802	$	3,828
2013	—		2,283		2,878		2,991		3,038
2014	—		—		2,730		3,358		3,474
2015	—		—		—		2,584		3,293
2016	—		—		—		—		2,944
							Total		$	16,577
All outstanding liabilities before 2012, net of reinsurance									187
Liabilities for claims and claim adjustment expenses, net of reinsurance									$	1,861



Average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2016
	1 year		2 years		3 years		4 years		5 years
Homeowners insurance	74.2	%	19.1	%	2.8	%	1.4	%	0.7	%

The reconciliation of the net incurred and paid claims development tables above to the reserve for property-liability insurance claims and claims expense in the Consolidated Statement of Financial Position as of December 31, 2016 is as follows:



($ in millions)
Net outstanding liabilities:
Auto insurance	$	12,961
Homeowners insurance	1,861
Other personal lines	1,310
Commercial lines	597
Other business lines	22
Discontinued Lines and Coverages ⁽¹⁾	1,382
Unallocated loss adjustment expenses	933
Net reserve for property-liability insurance claims and claims expense	19,066

Reinsurance recoverable:
Auto insurance	5,422
Homeowners insurance	9
Other personal lines	212
Commercial lines	21
Other business lines	10
Discontinued Lines and Coverages	508
Unallocated loss adjustment expenses	2
Total reinsurance recoverable	6,184
Gross reserve for property-liability insurance claims and claims expense	$	25,250

______________________________


⁽¹⁾	Discontinued Lines and Coverages includes business in run-off. All of the claims relate to accident years more than 10 years ago. IBNR reserves represent $800 million of the total reserves as of December 31, 2016.

Management believes that the reserve for property-liability insurance claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.

For further discussion of asbestos and environmental reserves, see Note 14.