AIG 2015 Annual Report Download - page 192

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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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
The Non-Life Insurance Companies’ loss reserves can generally be categorized into two distinct groups. Short-tail classes of
business consist principally of property, Personal Insurance 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, where the nature of claims is low frequency and high severity such as property,
the process for recording non-catastrophe quarterly loss reserves for more recent accident quarters is geared toward
maintaining incurred but not reported reserves (IBNR) based on percentages of net earned premiums for that business, rather
than projecting ultimate loss ratios based on reported losses. For example, the IBNR reserve required for the latest accident
quarter for a class of property business might be approximately 20 percent of the quarter’s earned premiums. This level of
reserve would generally be recorded regardless of the actual losses reported in the current quarter. The percent of premium
factor reflects both our expectation of the ultimate loss costs associated with the class of business and the expectation of the
percentage of ultimate loss costs that have not yet been reported. The expected ultimate loss costs generally reflect the
average loss costs from a period of preceding accident quarters that have been adjusted for changes in rate and loss cost
levels, mix of business, known exposure to unreported losses, or other factors affecting the particular class of business. The
expected percentage of ultimate loss costs that have not yet been reported would be derived from historical loss emergence
patterns. For more mature quarters, loss development methods would be used to determine the IBNR. For other classes
where the nature of claims is high frequency low severity, methods including loss development, frequency/severity or a multiple
of average monthly losses may be used to determine IBNR reserves. IBNR for claims arising from catastrophic events or
events of unusual severity would be determined in close collaboration with the claims department, using alternative techniques
or expected percentages of ultimate loss cost emergence based on historical loss emergence of similar claim types.