AIG 2015 Annual Report Download - page 199

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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The following is a discussion of actuarial methods applied by major class of business:
Class of Business or Category and Actuarial Method Application of Actuarial Method
Excess Casualty
We generally use a combination of loss development
methods, both multiplicative and/or additive, and
expected loss ratio methods for excess casualty
classes.
Frequency/severity methods are generally not used in
isolation to determine ultimate loss costs as the vast
majority of reported claims do not result in claim
payment. (However, frequency/severity methods assist
in the regular monitoring of the adequacy of carried
reserves to support incurred but not reported claims). In
addition, the average severity varies significantly from
accident year to accident year due to large losses which
characterize this class of business, as well as changing
proportions of claims which do not result in a claim
payment. To gain more stability in the projection, the
claims amenable to loss development methods are
analyzed in multiple layers: the layer capped at
$1 million, $4 million excess of $1 million, $5 million
excess of $5 million, $15 million excess of $10 million,
and the layer above $25 million. The expected loss
ratios for the layers above $5 million are derived from
the expected relationship between the layers, reflecting
the attachment point and limit by accident year.
In addition, we leverage case reserving based
methodologies for complex claims/ latent exposures
such as those involving toxic tort and other claims
accumulations.
Expected loss ratio methods are generally used for at
least the three latest accident years, due to the relatively
low credibility of the reported losses. The loss
experience is generally reviewed separately for lead
umbrella classes and for other excess classes, due to
the relatively shorter tail for lead umbrella business.
Automobile-related claims are generally reviewed
separately from non-auto claims, due to the shorter-tail
nature of the automobile-related claims. Claims relating
to certain latent exposures such as construction defects,
exhaustion of underlying product aggregate limits, or
mass torts are reviewed separately due to the unique
emergence patterns of losses relating to these claims.
The expected loss ratios used for recent accident years
are based on the projected ultimate loss ratios of prior
years, adjusted for rate changes, estimated loss cost
trends and all other changes that can be quantified.
During 2015, the observed claims deterioration for
complex claims/latent exposures impacted the case
reserving methodologies which are relied on in
determining ultimate loss costs. This deterioration was
considered in the expected loss ratio method that we
also consider in setting the reserve for mass tort
exposures. The provision for the base years of 1986-
2000 was increased, which raised the expected loss
ratios for the subsequent accident years.
D&O and Related Management Liability Classes of Business
We generally use a combination of loss development
methods and expected loss ratio methods for D&O and
related management liability classes of business.
Frequency/severity methods are generally not used in
isolation for these classes as the overall losses are
driven by large losses more than by claim frequency.
Severity trends have varied significantly from accident
year to accident year and care is required in analyzing
these trends by claim type. We also give weight to claim
department ground-up projections of ultimate loss on a
claim by claim basis as these may be more predictive of
ultimate loss values especially for older accident years.
These classes of business reflect claims made
coverage, and losses are characterized by low
frequency and high severity. In general, expected loss
ratio methods are given more weight in the more recent
accident years, whereas loss development methods are
given more weight in more mature accident years. For
the year-end 2015 loss reserve review, claims
projections for accident years 2014 and prior were used
after making adjustments for changing levels of
development in these estimates. In the 2015 analysis,
for the more mature accident years, we have generally
given more weight to the incurred and legal expense
loss development methods than in prior years’ reviews.
For the more recent accident years, we have made
some changes in the weights on certain market
segments to give more weight to the claims projections
than in the prior years’ reviews.