AIG 2013 Annual Report Download - page 198

the development of loss reserves. This is particularly true for long-tail casualty classes of business such as excess
casualty, asbestos, D&O, and primary or excess workers’ compensation.
All of our methods to calculate net reserves include assumptions about estimated reinsurance recoveries and their
collectability. Reinsurance collectability is evaluated independently of the reserving process and appropriate
allowances for uncollectible reinsurance are established.
In some of our estimation processes we rely on the claims department estimates of our case reserves as an input to
our best estimate of the ultimate loss cost.
Overview of Loss Reserving Process and Methods
AIG Property Casualty loss reserves can generally be categorized into two distinct groups. Short-tail classes of
business consist principally of property, personal lines and certain casualty classes. Long-tail casualty classes of
business include excess and umbrella liability, D&O, professional liability, medical malpractice, workers’
compensation, general liability, products liability and related classes.
Short-Tail Reserves
For operations writing short-tail coverages, such as property coverages, the process of recording quarterly loss
reserves is generally geared toward maintaining an appropriate reserve for the outstanding exposure, rather than
determining an expected loss ratio for current business. For example, the IBNR reserve required for a class of
property business might be expected to approximate 20 percent of the latest year’s earned premiums. This level of
reserve would generally be maintained regardless of the loss ratio emerging in the current quarter. The 20 percent
factor would be adjusted to reflect changes in rate levels, loss reporting patterns, known exposure to unreported
losses, or other factors affecting the particular class of business. For some classes, a loss development factor
method may be used.
Long-Tail Reserves
Estimation of ultimate net losses and loss expenses (net losses) for long-tail casualty classes of business is
a complex process and depends on a number of factors, including the class and volume of business, as well as
estimates of the reinsurance recoverable. Experience in the more recent accident years shows limited statistical
credibility in reported net losses on long-tail casualty classes of business. That is because a relatively low proportion
of net incurred losses represent reported claims and expenses, and an even smaller percentage represent net losses
paid. Therefore, IBNR constitutes a relatively high proportion of net losses.
To estimate net losses for long-tail casualty classes of business, we use a variety of actuarial methods and
assumptions and other analytical techniques as described below. A detailed reserve review is generally performed at
least once per year to allow for comprehensive actuarial evaluation and collaboration with claims, underwriting,
business unit management, risk management and senior management.
We generally make a number of actuarial assumptions in the review of reserves for each class of business.
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AIG 2013 Form 10-K180
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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