7 Unpaid claims and claim adjustment expenses

The liability for unpaid claims and claim adjustment expenses as of 31 December is analysed as follows:

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USD millions

2012

2013

Non-Life

53 010

50 392

Life & Health

10 660

11 092

Total

63 670

61 484

A reconciliation of the opening and closing reserve balances for non-life unpaid claims and claim adjustment expenses for the period is presented as follows:

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USD millions

2012

2013

Balance as of 1 January

53 827

53 010

Reinsurance recoverable

–6 610

–7 101

Deferred expense on retroactive reinsurance

–320

–229

Net balance as of 1 January

46 897

45 680

 

 

 

Incurred related to:

 

 

Current year

9 050

10 765

Prior year

–1 477

–1 371

Amortisation of deferred expense on retroactive reinsurance and impact of commutations

64

151

Total incurred

7 637

9 545

 

 

 

Paid related to:

 

 

Current year

–1 525

–2 103

Prior year

–7 962

–9 265

Total paid

–9 487

–11 368

 

 

 

Foreign exchange

334

211

Effect of acquisitions, disposals, new retroactive reinsurance and other items

299

239

Net balance as of 31 December

45 680

44 307

 

 

 

Reinsurance recoverable

7 101

6 029

Deferred expense on retroactive reinsurance

229

56

Balance as of 31 December

53 010

50 392

The Group does not discount liabilities arising from prospective property and casualty insurance and reinsurance contracts, including liabilities which are discounted for US statutory reporting purposes. Liabilities arising from property and casualty insurance and reinsurance contracts acquired in a business combination are initially recognised at fair value in accordance with the purchase method of accounting.

Prior-year development

Net claims development on prior years was favourable overall during 2013, driven by reserve releases from property, liability, accident and health and several of the special lines, especially engineering. In most cases, the releases were the result of better-than-expected claims experience helped, particularly in the case of accident and health, by commutations. These releases come about despite further strengthening for US and UK asbestos and environmental claims, strengthening on motor business in several European countries and adverse development of claims arising from the New Zealand earthquakes, partly offset by favourable development on claims from Hurricane Sandy in the US.

A summary of prior year claims development by lines of business is shown below:

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USD millions

2012

2013

Line of business:

 

 

Property

–242

–441

Casualty

–699

–455

Specialty

–536

–475

Total

–1 477

–1 371

US asbestos and environmental claims exposure

The Groupʼs obligation for claims payments and claims settlement charges also includes obligations for long-latent injury claims arising out of policies written prior to 1986, in particular in the area of US asbestos and environmental liability.

At the end of 2013, the Group carried net reserves for US asbestos and environmental liabilities equal to USD 1 950 million. During 2013, the Group incurred net losses of USD 352 million and paid net against these liabilities USD 393 million.

Estimating ultimate asbestos and environmental liabilities is particularly complex for a number of reasons relating in part to the long period between exposure and manifestation of claims, and in part to other factors, which include risks and lack of predictability inherent in complex litigation, changes in projected costs to resolve, and in the projected number of, asbestos and environmental claims, the effect of bankruptcy protection, insolvencies, and changes in the legal, legislative and regulatory environment. As a result, the Group believes that projection of exposures for asbestos and environmental claims is subject to far less predictability relative to non-environmental and non-asbestos exposures. Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts and the current state of the law. However, reserves are subject to revision as new information becomes available and as claims develop. Additional liabilities may arise for amounts in excess of reserves, and the Groupʼs estimate of claims and claim adjustment expenses may change. Any such additional liabilities or increases in estimates cannot be reasonably estimated in advance but could result in charges that could be material to operating results.

The Group maintains an active commutation strategy to reduce exposure. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which should not imply a reduction in reserve adequacy.