AIG 2012 Annual Report Download - page 38

.....................................................................................................................................................................................
The Loss Reserve Development Process
The process of establishing the liability for unpaid losses and loss adjustment expenses is complex and imprecise
because it must take into consideration many variables that are subject to the outcome of future events. As a result,
informed subjective estimates and judgments about our ultimate exposure to losses are an integral component of our
loss reserving process.
We use a number of techniques to analyze the adequacy of the Because reserve estimates
established net liability for unpaid claims and claims adjustment expense are subject to the outcome of
(net loss reserves). Using these analytical techniques, we monitor the
adequacy of AIG’s established reserves and determine appropriate future events, changes in
assumptions for inflation and other factors influencing loss costs. Our prior year estimates are
analysis also takes into account emerging specific development patterns, unavoidable in the insurance
such as case reserve redundancies or deficiencies and IBNR emergence.
We also consider specific factors that may impact losses, such as industry. These changes in
changing trends in medical costs, unemployment levels and other estimates are sometimes
economic indicators, as well as changes in legislation and social attitudes
that may affect decisions to file claims or the magnitude of court awards. referred to as ‘‘loss
See Item 7. MD&A – Critical Accounting Estimates for a description of our development’’ or ‘‘reserve
loss reserving process. development.’’
A significant portion of AIG Property Casualty’s business is in the U.S.
commercial casualty class, which tends to involve longer periods of time
for the reporting and settlement of claims and may increase the risk and
uncertainty with respect to our loss reserve development.
Analysis of Consolidated Loss Reserve Development
The ‘‘Analysis of Consolidated Loss Reserve Development’’ table shown on page 22 presents the development of
prior year net loss reserves for calendar years 2002 through 2012 for each balance sheet in that period. The
information in the table is presented in accordance with reporting requirements of the Securities and Exchange
Commission (SEC). This table should be interpreted with care by those not familiar with its format or those who are
familiar with other loss development analyses arranged in an accident year or underwriting year basis rather than the
balance sheet, as shown below. See Note 13 to the Consolidated Financial Statements.
The top row of the table shows Net Reserves Held (the net liability for unpaid claims and claims adjustment
expenses) at each balance sheet date, net of discount. This liability represents the estimated amount of losses and
loss adjustment expenses for claims arising in all years prior to the balance sheet date that were unpaid as of that
balance sheet date, including estimates for IBNR claims. The amount of loss reserve discount included in the net
reserves at each date is shown immediately below the net reserves held. The undiscounted reserve at each date is
equal to the sum of the discount and the net reserves held.
For example, Net Reserves Held (Undiscounted) was $30.8 billion at December 31, 2002.
The next section of the table shows the original Net Undiscounted Reserves re-estimated over 10 years. This
re-estimation takes into consideration a number of factors, including changes in the estimated frequency of reported
claims, effects of significant judgments, the emergence of latent exposures, and changes in medical cost trends. For
example, the original undiscounted reserve of $30.8 billion at December 31, 2002, was re-estimated to $58.0 billion
at December 31, 2012. The amount of the development related to losses settled or re-estimated in 2012, but incurred
in 2009, is included in the cumulative development amount for years 2009, 2010 and 2011. Any increase or decrease
in the estimate is reflected in operating results in the period in which the estimate is changed.
..................................................................................................................................................................................................................................
AIG 2012 Form 10-K 21
ITEM 1 / BUSINESS