AIG 2015 Annual Report Download - page 194

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES

194
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 class of business in accordance with
Actuarial Standards of Practice. These standards provide that the unpaid claim estimate may be presented in a variety of
ways, such as a point estimate, a range of estimates, a point estimate based on the expected value of several reasonable
estimates, or a probability distribution of the unpaid claim amount. Further, the actuarial central estimate represents an
expected value using the range of reasonably possible outcomes.
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 selected our central estimate based on point estimates from each method with weights that vary by accident year. In 2015,
we began developing our ranges of reasonable estimates for certain classes by evaluating ranges derived from multiple
methodologies. We considered the range of reasonable parameter selections (for example, three-year versus ten-year
average loss development factors) for each appropriate method and calculated a range of indications for each method.
Where we have ranges, we assess the position of the actuarial central estimate in the range to help inform management’s
decision making. The range of reasonable estimates are not intended to cover all possibilities or extreme values.
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 2015, 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.
A critical component of our detailed valuation reviews is our peer review of our reserving analyses and conclusions, where
actuaries independent of the initial review evaluate the reasonableness of assumptions used, methods selected and
weightings given to different methods. In addition, each detailed valuation review is subjected to a challenge process by
specialists in our Enterprise Risk Management group.