Retrospective reinsurance

January 2017: AIG signs a 20 billion dollar retroactive cover with National Indemnity, a Berkshire Hathaway company, on its 2015 and prior loss reserves, for a premium of about 10 billion. Retrospective reinsurance covers liabilities already incurred, through a loss portfolio transfer or an adverse development cover, and is the central tool of the legacy market. Its ambiguity: it does not extinguish the cedant's obligation to its policyholder. It swaps a claims risk, known and reservable, for an unpriced counterparty risk correlated with the peril transferred, since the acquirer defaults precisely when the liabilities develop badly. The product more often covers the prior years of live books than dead lines, and there stripping volatility while keeping the profit is an accounting effect more than a risk transfer. In January 2017, American International Group entered into an adverse development cover with National Indemnity Company, a Berkshire Hathaway subsidiary, on roughly $25 billion of North American long-tail reserves predating 2016, for a premium of $9.8 billion, one of the largest transactions of its kind ever concluded.