| December 31 (In millions) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Investment contracts and universal life benefits | $ | 63,136 | $ | 63,787 | ||
| Life insurance benefits(a) | 31,660 | 28,040 | ||||
| Unpaid claims and claims adjustment expenses(b) | 30,288 | 29,176 | ||||
| Unearned premiums | 6,859 | 7,109 | ||||
| Separate accounts (see note 17) | 8,959 | 8,316 | ||||
| Total | $ | 140,902 | $ | 136,428 | ||
| (a) | Life insurance benefits are accounted for mainly by a net-level-premium method using estimated yields generally ranging from 2.0% to 8.5% in 2004 and 1.2% to 8.5% in 2003. |
| (b) | Principally property and casualty reserves amounting to $25.0 billion and $24.9 billion at December 31, 2004 and 2003, respectively. Included amounts for both reported and IBNR claims, reduced by anticipated salvage and subrogation recoveries. Estimates of liabilities are reviewed and updated continually, with changes in estimated losses reflected in operations. |
When insurance affiliates cede insurance to third parties, they are not relieved of their primary obligation to policyholders. Losses on ceded risks give rise to claims for recovery; we establish allowances for probable losses on such receivables from reinsurers as required.
We recognize reinsurance recoveries as a reduction of the Statement of Earnings caption “Insurance losses and policyholder and annuity benefits.” Reinsurance recoveries were $1,369 million, $1,781 million and $2,234 million for the years ended December 31, 2004, 2003 and 2002, respectively.
The insurance liability for unpaid claims and claims adjustment expenses related to policies that may cover environmental and asbestos exposures is based on known facts and an assessment of applicable law and coverage litigation. Liabilities are recognized for both known and unasserted claims (including the cost of related litigation) when sufficient information has been developed to indicate that a claim has been incurred and a range of potential losses can be reasonably estimated. Developed case law and adequate claim history do not exist for certain claims, principally because of significant uncertainties as to both the level of ultimate losses that will occur and what portion, if any, will be deemed to be insured amounts.
A summary of activity affecting unpaid claims and claims adjustment expenses, principally in property and casualty lines, follows.
| (In millions) | 2004 | 2003 | 2002 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1 – gross | $ | 29,176 | $ | 30,571 | $ | 27,233 | |||
| Less reinsurance recoverables | (8,313 | ) | (9,646 | ) | (9,400 | ) | |||
| Balance at January 1 – net | 20,863 | 20,925 | 17,833 | ||||||
| Claims and expenses incurred | |||||||||
| Current year | 8,641 | 9,002 | 9,505 | ||||||
| Prior years | 1,098 | 740 | 3,188 | ||||||
| Claims and expenses paid | |||||||||
| Current year | (1,985 | ) | (2,565 | ) | (3,173 | ) | |||
| Prior years | (6,967 | ) | (7,079 | ) | (6,918 | ) | |||
| Other(a) | 1,110 | (160 | ) | 490 | |||||
| Balance at December 31 – net | 22,760 | 20,863 | 20,925 | ||||||
| Add reinsurance recoverables | 7,528 | 8,313 | 9,646 | ||||||
| Balance at December 31 – gross | $ | 30,288 | $ | 29,176 | $ | 30,571 | |||
| (a) | Included $633 million in 2004 related to the adoption of FIN 46R. |
Claims and expenses incurred — prior years represents additional losses (adverse development) recognized in any year for loss events that occurred before the beginning of that year. Adverse development, which amounted to 5%, 4% and 18% of beginning of year loss reserves in 2004, 2003 and 2002, respectively, was primarily encountered at GE Insurance Solutions.
Reported claims activity at GE Insurance Solutions related to prior-year loss events, particularly for liability-related exposures underwritten in 1997 through 2001, has continued to develop adversely to previous expectations. More specifically, reported claims activity for these underwriting years accelerated dramatically in 2002, affecting much of our liability-related product exposures, including hospital medical malpractice, product liability, professional liability, umbrella liability, workers compensation, individual liability and asbestos. In response to these data, we adjusted our best estimate of ultimate losses to be higher in the range of what were viewed as reasonably possible loss scenarios at that time, increasing recorded reserves by $2.5 billion in the fourth quarter of 2002, for a total of $3.5 billion adverse development at GE Insurance Solutions for the year.
For a majority of our lines of business, reported claims activity in 2003 was reasonably close to expected amounts. However, for certain lines — principally medical malpractice, product liability and certain director and officer related coverage — the reported claims volumes exceeded our revised loss expectations. Accordingly, we increased our loss reserves to the newly-indicated ultimate levels, recording adverse development of $0.9 billion in 2003.
In 2004, as part of our comprehensive annual assessment of recorded claim-related liabilities, we observed that reported claims activity in certain product lines, substantially related to the 1997 through 2001 underwriting years, continued to exceed previously established loss expectations. The more significant lines of business affected were workers compensation, hospital and professional liability, and asbestos and environmental exposures. Incorporating this updated information into our reserving process led to an increase in ultimate loss projections and corresponding reserve levels by $1.1 billion for the year. We will continue to monitor reported claims activity for all lines of business in the future and take necessary reserve actions — either to increase or decrease reserves — as our estimates continue to mature.
Our mortgage insurance business experienced favorable development during the three-year period, primarily reflecting continued strength in certain real estate markets and the success of our loss containment initiatives.
Financial guarantees and credit life risk of insurance affiliates are summarized below.
| December 31 (In millions) | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|
| Guarantees, principally on municipal bonds | $ | 1,190 | $ | 1,190 | ||
| Mortgage insurance risk in force | 194,600 | 146,627 | ||||
| Credit life insurance risk in force | 29,906 | 25,728 | ||||
| Less reinsurance | (2,397 | ) | (2,207 | ) | ||
| Total | $ | 223,299 | $ | 171,338 | ||
Certain insurance affiliates offer insurance guaranteeing the timely payment of scheduled principal and interest on municipal bonds. Other insurance affiliates provide insurance to protect residential mortgage lenders from severe financial loss caused by the non-payment of loans and issue credit life insurance designed to pay the balance due on a loan if the borrower dies before the loan is repaid. As part of their overall risk management process, insurance affiliates cede to third parties a portion of their risk associated with these guarantees. In doing so, they are not relieved of their primary obligation to policyholders.
 |
 |
 |