5 Unpaid claims and claim adjustment expenses

A reconciliation of the opening and closing reserve balances for unpaid claims and claim adjustment expenses for the years ended 31 December is presented as follows:

Prior-year development

Non-life claims development during 2019 on prior accident years is mainly due to adverse development for Casualty impacted by large man-made losses predominantly in North America. Property was impacted by adverse natural catastrophe development in Asia as well as large man-made losses, partly offset by reserves releases from North America natural catastrophe events. Specialty was impacted by large man-made losses and adverse development, partly offset by reserves releases from North America natural catastrophe events.

For life and health lines of business, claims development on prior year business was mainly driven by adverse development for the disability portfolio in Australia, Continental Europe and the US. This was partly offset by positive experience in other regions and lines of business including Canada, Asia, and the UK. Claims development related to prior years for the disability portfolio also includes an element of interest accretion for unpaid claims reported at an estimated present value. Unfavourable claims development for the Australia group disability portfolio is offset by a reduction in profit share reserve.

A summary of prior year net claims and claim adjustment expenses development by lines of business for the years ended 31 December is shown below¹:

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 2019, the Group carried net reserves for US asbestos and environmental liabilities equal to USD 1 584 million. During 2019, the Group incurred net losses of USD 32 million and net paid of USD 308 million in relation to these liabilities.

The net paid losses include a settlement of USD 190 million for late asbestos and environmental reported claims presented by one cedent in Q2 2019.

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.

Short duration contract unpaid claims and claim adjustment expenses

Basis of presentation for claims development information

This section of the note provides claims development information on an accident year basis.

Claims development information and information on reserves for claims relating to insured events that have occurred but have not yet been reported or not enough reported (“IBNR”) are generally presented by line of business for individually significant categories. Starting from a line of business split, additional aggregation or disaggregation is provided where appropriate, necessary and practicable (“disaggregation categories”). For instance, Reinsurance liability and motor lines of business are further disaggregated into proportional and non-proportional treaty types to provide more specific information on claims development, whereas specialty is shown as one distinct category.

In the Property & Casualty Reinsurance and Corporate Solutions segments, all contracts that transfer significant insurance risk are included in scope to the extent they can be allocated to a disaggregation category. For many reinsurance contracts, proportional contracts in particular, ceding companies do not report losses by accident year. In these cases, the Group has allocated reported losses by underwriting year to accident year to produce the accident year tables. Similarly, IBNR is calculated on an underwriting year basis and then the liabilities are allocated to accident year.

In the Life & Health Reinsurance segment, contracts classified as short duration include group life business, certain types of disability and long-term care contracts, group accident, health coverage including critical illness and medical expenses. The Group provides claims development information for Life & Health Reinsurance where reported accident year information is available and there is potential for claims development. This primarily applies to the Group‘s disability lines classified as short duration. This business is generally considered to have relatively higher claims estimation uncertainty than other life and health lines such as group life, due to longer claims development periods.

In the Life Capital segment, short duration contracts include mainly disability medical expenses business. The Group provides no claims development information for Life Capital as its short duration reserves are not material.

Amounts shown in the claims development tables are net of external retrocession and retrocession between business segments to the extent a retrocession program can be allocated to a disaggregation category. Ceded retroactive reinsurance is not included in the claims development table if it cannot be allocated on a reasonable basis to the disaggregation categories used to present claims development information.

Claims development information and information on IBNR reserves are shown on a nominal basis, also for cases where the Group discounts claims liabilities for measurement under US GAAP. Information is shown per accident year and by reporting period. The number of years shown in the claims development tables differs by business segment:

For Property & Casualty Reinsurance and for Life & Health Reinsurance long‑tail, the Group discloses data for ten accident years and reporting periods.

The Corporate Solutions business segment was created in 2012. Therefore, seven accident years and reporting periods are shown for this business unit. All but an immaterial portion of claims arising from accident years prior to 2012 relate to accident years which are over ten years ago and therefore out of the required range of disclosure. Business ceded to Property & Casualty Reinsurance prior to 2012 is included in the net claims development information reported by this segment.

The current reporting period estimate of net claims liabilities for accident years older than the number of years shown in the claims development tables is presented as a total after disclosure of cumulative paid claims.

The information presented in claims development tables is presented at current balance sheet foreign exchange rates as of the date of these financial statements to permit an analysis of claims development excluding the impact of foreign exchange movements.

Some of the information provided in the following tables, is Required Supplementary Information (RSI) under US GAAP. Therefore it does not form part of these consolidated audited financial statements. Claims development information for all periods except the current reporting period and any information derived from it – including average annual percentage payout of claims incurred – is considered RSI and is identified as RSI in the tables presented.

Methodology for determining the presented amounts of liabilities for IBNR claims

The liability for unpaid claims and claim adjustment expenses is based on an estimate of the ultimate cost of settling the claims based on both information reported to us by ceding companies and internal estimates.

Non-life re/insurance contracts

For reinsurance business, cedents report their case reserves and their estimated IBNR to the Group. The Group develops and recognises its own estimate of IBNR claims, which includes circumstances in which the cedent has not reported any claims to the Group or where the Group‘s estimate of reserves needed to cover reported claims differs from the amounts reported by cedents. For reinsurance business, case reserves and estimated IBNR reported by cedents to the Group have been accounted for as case reserves in previous years. IBNR reported by cedents are presented together with the Group‘s own estimate of IBNR as IBNR in the claims development tables. Reserving for insurance business is performed similarly, except that the Group estimates case reserves as well. Reserving is done on portfolio or contract level depending on the features of the contract:

For business reviewed on a portfolio level, the expected ultimate losses are set for most lines and types of business based on analysis performed using standard actuarial techniques. In general, contracts are aggregated into portfolios by combining contracts with similar features.

In most cases, these standard actuarial techniques encompass a number of loss development factor techniques applied to claim tables of paid and reported losses. Other actuarial techniques may be applicable to specific categories. For instance, the analysis of frequency and severity could be applied in all disaggregation categories. Life contingency techniques for projecting regular payments related to bodily injury claims are applied to motor proportional, motor non-proportional, liability proportional, liability non-proportional, accident and health and similar Corporate Solutions lines, where the information is available. In some cases, techniques specific to the projection of future payments for specific risks such as asbestos or pollution claims are applied to both proportional and non-proportional liability claims, also in Corporate Solutions (see also separate section “US asbestos and environmental claims exposure”).

Contract-level reserving is based on standard actuarial techniques but requires more detailed contract, pricing, claim and exposure information than required for the business reviewed on a portfolio level.

In addition, the following applies to all non-life re/insurance business:

• For the most recent underwriting years, reliance may be made on the Group‘s costing and underwriting functions for the initial estimates of claims, although the initial reserving estimates may differ from these pricing estimates if there is good reason to believe losses are likely to emerge higher or lower, and in light of the limited claims experience to date. Reviews of those initial estimates are performed regularly, forming a basis for adjustments on both the current and prior underwriting years.
• The reserving process considers any information available in respect of either a specific case or a large loss event and the impact of any unusual features in the technical accounting of information provided by cedents.

Life and health re/insurance contracts

For the Life & Health Reinsurance long tail business, the liability for IBNR claims includes provision for “not yet reported claims” expected to have been incurred in respect of both already processed and not yet processed reinsurance accounts and generally includes provisions for the cost of claims on disability contracts that currently are within their deferred period. The IBNR reserving calculations have been made using appropriate techniques, such as chain ladder and/or Bornhuetter-Ferguson approaches, depending upon the level of detail available and the assumed level of development of the claim. For certain lines of business, IBNR claims reserves include reported but not admitted claims, allowing for expected rates of decline for these claims.

Claims frequency information

Claims frequency information is not available for the disaggregation categories of Property & Casualty Reinsurance, as cedents do not report claims frequency information to the Group for most of the assumed reinsurance contract types. These contracts are to be found in all disaggregation categories presented.

Life & Health Reinsurance reports claims frequency information based on individual incidence. The number of reported claims is the actual number of claims booked. For Group income protection business, claims with multiple payments in a year are counted as one claim with the corresponding amount annualised. Claims that are reported but not admitted are included in the claim count.

For Corporate Solutions, claims frequency is displayed for direct business only, as individual claims information is generally not available for assumed and ceded business. Claims are counted individually per contract to produce the claims frequency table. For some direct business, summary reports are received and multiple claims are booked under a single claim code; this is usually done at a program, policy year, state, country and/or line of business level of detail. This approach may be applied to business which has a high volume of claim counts, but with only minor claims dollars associated with each claim.

Property & Casualty Reinsurance – Property

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

The liability for unpaid claims and claim adjustment expenses for property in Property & Casualty Reinsurance shows positive development on most recent accident years. Claims in accident year 2011 were at a high level due to several large natural catastrophes including the earthquake and tsunami in Japan, the earthquakes in Christchurch, New Zealand, and floods in Thailand. The 2017 accident year claims incurred are higher due to natural catastrophes, mainly stemming from Cyclone Debbie, hurricanes Harvey, Irma and Maria in the Americas, the two earthquakes in Mexico and the wildfires in California. The 2018 to 2019 accident year claims incurred are lower than 2017 but include a higher level of natural catastrophes than 2012 to 2016.

Property & Casualty Reinsurance – Liability, proportional

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

The increase in the incurred losses for accident years 2013 to 2019 is driven by volume increases of business being written. The increases in the incurred losses in reporting year 2019 for accident years 2015 to 2018 are driven by US business.

In line with the Group‘s policy, cash flows under Loss Portfolio Transfers are reported through claims paid. For longer-tailed lines and depending on the business volume written, timing of cash flows can lead to net inward payments across the whole portfolio in the first development year of the contract for some accident years.

Property & Casualty Reinsurance – Liability, non-proportional

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

The increase in incurred losses for accident year 2015 compared to other years is due to an increase in volume of business written in that year. Accident year 2019 includes an Adverse Development Cover and a Loss Portfolio Transfer written with Corporate Solutions. Liabilities before 2010 include reserves for historic US asbestos and environmental losses.

In line with the Group‘s policy, cash flows under Loss Portfolio Transfers are reported through claims paid. For longer-tailed lines and depending on the business volume written, timing of cash flows can lead to net inward payments across the whole portfolio in the first development year of the contract for some accident years.

Property & Casualty Reinsurance – Accident & Health

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

The increase in incurred losses from accident year 2015 onwards is due to an increase in the volume of workers‘ compensation written on a proportional basis. The 2010 and prior accident years include the run-off of business written by entities acquired as part of the acquisition of General Electric Insurance Solutions during 2006. This business, which generally had a longer payment pattern, was not renewed.

Property & Casualty Reinsurance – Motor, proportional

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

The increase in the incurred losses from accident years 2010 to 2016 is driven by new business volume across all regions. Proportional motor business includes both longer-tailed liability business and shorter-tailed hull business.

The negative IBNRs are due to overstated case reserves, mainly on the German business, and accident year 2011 includes the effects of an outwards proportional contract on inwards non-proportional business.

Property & Casualty Reinsurance – Motor, non-proportional

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

Claims development in non-proportional motor business is considered long-tailed as it is dominated by liability exposures leading to bodily injury claims which pay out for the lifetime of the claimant.

For accident year 2011, negative claims paid in the first year are due to the commutation of an external retrocession on acquired retroactive business and the increase in incurred losses for accident year 2019 compared to other years is due to an increase in volume of business written.

In line with the Group‘s policy, cash flows under Loss Portfolio Transfers are reported through claims paid. For longer-tailed lines and depending on the business volume written, timing of cash flows can lead to net inward payments across the whole portfolio in the first development year of the contract for some accident years.

Property & Casualty Reinsurance – Specialty

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

This category contains several individual large losses on marine, aviation and space lines, including the Costa Concordia event in accident year 2012. The 2017 accident year claims incurred is higher due to natural catastrophes mainly stemming from hurricanes Harvey, Irma and Maria in the Americas which have reduced in reporting year 2019.

Corporate Solutions

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

For the 2019 reporting year, a Loss Portfolio Transfer to P&C Reinsurance of US liability lines of business reduced reserves by USD 1.2 billion in total across all accident years. Excluding this impact, there was unfavourable prior-year development across all lines of business, in particular US liability, mainly driven by large and medium-sized man-made losses. The impact of this unfavourable development was reduced by recoveries under an Adverse Development Cover with P&C Reinsurance in place for the second half of the year. A recovery in 2019 of USD 0.6 billion under this cover is included in the 2018 accident year above. P&C Reinsurance reports both the Adverse Development Cover and the Loss Portfolio Transfer under accident year 2019 (see ˝Property & Casualty Reinsurance – Liability, non-proportional”).

Life & Health Reinsurance, long tail

Incurred claims and allocated claim adjustment expenses, net of reinsurance

Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance

Average annual percentage payout of incurred claims by age, net of reinsurance

In the reporting year 2013, the Group significantly strengthened IBNR claims liabilities in Australia for some lines of business. In addition, for 2013 and 2014 the effect of business volume increases is discernible as well. The decrease in incurred losses for accident year 2019 is due to the lower volume of business being written in Australia.

Reconciliation of gross liability for unpaid claims and claim adjustment expenses

The following table reconciles the Group‘s net outstanding liabilities to the gross liabilities for unpaid claims and claim adjustment expenses.

The net outstanding liabilities correspond to the total liabilities for unpaid claims and claim adjustment expenses, net of reinsurance for each disaggregation category.

Other short duration contract lines includes reserves for business that is not material to the Group and where accident year information is not available. For Life & Health Reinsurance, in certain markets, cedents do not provide sufficient information to reinsurers to split claims incurred and claims paid by accident year. This is based on existing market practice. For these markets, an assessment of available information from other sources was made along with investigating approximations that could be used to provide claims development information by accident year. However, these alternate sources and estimates, based on currently available data and methods, could not be used to generate meaningful and representative accident year information and therefore have been excluded from disclosure. Other short duration contract lines also contain other treaties from Property & Casualty Reinsurance and Corporate Solutions which could not be allocated on a consistent basis to disaggregation categories or specific accident years.

For details on consolidation please refer to Note 2.

For the year ended 31 December

Discounting information

The following disclosure covers the discounting impact for the disaggregation categories included in the claims development information. Discounting information for Life & Health Reinsurance long tail as of 31 December was as follows:

Please refer to Note 1 for more details about the Group‘s discounting approach for unpaid claims and claim adjustment expenses.