AIG 2014 Annual Report Download - page 197

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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We generally make a number of actuarial assumptions in the review of reserves for each class of business.
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 2014 for the year-end 2014 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 the Non-Life Insurance Companies 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, real gross domestic product (GDP) growth, inflation, employment rates or unemployment duration, stock
market volatility, corporate bond spreads, 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 of the Non-Life Insurance Company 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 2014, 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 Corporate and Other.