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 law and regulation, 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 and reserves and reinsurance recoverables for the Discontinued Lines and Coverages, 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 Condensed Consolidated Statements of Operations in the period such changes are determined.

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 Condensed Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.

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



($ in millions)	Nine months ended September 30,
	2017			2016
Balance as of January 1	$	25,250		$	23,869
Less reinsurance recoverables	6,184			5,892
Net balance as of January 1	19,066			17,977
SquareTrade acquisition as of January 3, 2017	17			—
Incurred claims and claims expense related to:
Current year	16,971			17,018
Prior years	(321		)	120
Total incurred	16,650			17,138
Claims and claims expense paid related to:
Current year	10,052			10,210
Prior years	5,784			5,804
Total paid	15,836			16,014
Net balance as of September 30	19,897			19,101
Plus reinsurance recoverables	7,257			6,349
Balance as of September 30	$	27,154		$	25,450

Incurred claims and claims expense represents the sum of paid losses and reserve changes in the period. This expense includes losses from catastrophes of $2.64 billion and $2.27 billion in the nine months ended September 30, 2017 and 2016, respectively, net of reinsurance and other recoveries. 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.

During the nine months ended September 30, 2017, incurred claims and claims expense included $321 million of prior year reserve reestimates, increasing net income. Prior year reserve reestimates are composed of net decreases in auto reserves of $336 million primarily due to injury coverages claim severity development that was better than expected, net decreases in homeowners reserves of $86 million due to favorable non-catastrophe reserve reestimates, net increases in Discontinued Lines and Coverages of $93 million, and net increases in other reserves of $8 million. Incurred claims and claims expense includes favorable catastrophe loss reestimates of $10 million, net of reinsurance and other recoveries.