AIG 2013 Annual Report Download - page 199

For longer-tail classes of business, we generally make actuarial assumptions with respect
to the following:
•Loss cost trend factors which are used to establish expected loss ratios for subsequent accident years
based on the projected loss ratios for prior accident years.
•Expected loss ratios for the latest accident year (i.e., accident year 2013 for the year-end 2013 loss reserve
analysis) and, in some cases for accident years prior to the latest accident year. The expected loss ratio
generally reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of
rate changes and other quantifiable factors on the loss ratio. For low-frequency, high-severity classes such as
excess casualty, expected loss ratios generally are used for at least the three most recent accident years.
•Loss development factors which are used to project the reported losses for each accident year to an
ultimate basis. Generally, the actual loss development factors observed from prior accident years would be
used as a basis to determine the loss development factors for the subsequent accident years.
We record quarterly changes in loss reserves for each of AIG Property Casualty’s classes of business. The
overall change in our loss reserves is based on the sum of the changes for all classes of business. For most long-tail
classes of business, the quarterly loss reserve changes are based on the estimated current loss ratio for each class
of coverage less any amounts paid. Also, any change in estimated ultimate losses from prior accident years deemed
to be necessary based on the results of our latest reserve studies or large loss analysis, either positive or negative,
is reflected in the loss reserve for the current quarter.
Details of the Loss Reserving Process
The process of determining the current loss ratio for each class of business is based on a variety of factors.
These include considerations such as: prior accident year and policy year loss ratios; rate changes; and changes in
coverage, reinsurance, or mix of business. Other considerations include actual and anticipated changes in external
factors such as trends in loss costs or in the legal and claims environment. The current loss ratio for each class of
business is intended to represent our best estimate of the current loss ratio after reflecting all of the relevant factors.
At the close of each quarter, the assumptions underlying the loss ratios are reviewed to determine if the loss ratios
remain appropriate. This process includes a review of the actual claims experience in the quarter, actual rate
changes achieved, actual changes in coverage, reinsurance or mix of business, and changes in other factors that
may affect the loss ratio. When this review suggests that the initially determined loss ratio is no longer appropriate,
the loss ratio for current business is changed to reflect the revised assumptions.
We conduct a comprehensive loss reserve review at least annually for each AIG Property Casualty
subsidiary and class of business. The reserve analysis for each class of business is performed by the actuarial
personnel who are most familiar with that class of business. In this process, the actuaries are required to make
numerous assumptions, including the selection of loss development factors and loss cost trend factors. They are also
required to determine and select the most appropriate actuarial methods for each business class. Additionally, they
must determine the segmentation of data that will enable the most suitable test of reserve adequacy. In the course of
these detailed reserve reviews an actuarial central estimate of the loss reserve is determined. The sum of these
central estimates for each class of business provides an overall actuarial central estimate of the loss reserve for that
class.
We continue to consult with third party environmental litigation and engineering specialists, third party toxic tort
claims professionals, third party clinical and public health specialists, third party workers’ compensation claims
adjusters and third party actuarial advisors to help inform our judgments. In 2013, the third party actuarial reviews
covered the majority of net reserves held for our Commercial long-tail classes of business, and run-off portfolios
reported in Other.
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AIG 2013 Form 10-K 181
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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