AIG 2013 Annual Report Download - page 200

In determining the actual carried reserves, we consider both the internal actuarial central
estimate and numerous other internal and external factors, including:
• an assessment of economic conditions;
• changes in the legal, regulatory, judicial and social environment including changes in road safety, public health
and cleanup standards;
• changes in medical cost trends (inflation, intensity and utilization of medical services) and wage inflation
trends;
• underlying policy pricing, terms and conditions including attachment points and policy limits;
• claims handling processes and enhancements;
• third-party claims reviews that are periodically performed for key classes of claims such as toxic tort,
environmental and other complex casualty claims and
• third-party actuarial reviews that are periodically performed for key classes of business.
Loss reserve development can also be affected by commutations of assumed and ceded reinsurance agreements.
In testing the reserves for each class of business, our actuaries determine the most appropriate actuarial
methods. This determination is based on a variety of factors including the nature of the claims associated with the
class of business, such as the frequency or severity of the claims. Other factors considered include the loss
development characteristics associated with the claims, the volume of claim data available for the applicable class,
and the applicability of various actuarial methods to the class. In addition to determining the actuarial methods, the
actuaries determine the appropriate loss reserve groupings of data. For example, we write many unique subclasses
of professional liability. For pricing or other purposes, it is appropriate to evaluate the profitability of each subclass
individually. However, for purposes of estimating the loss reserves for many classes of business, we believe it is
appropriate to combine the subclasses into larger groups to produce a greater degree of credibility in the claims
experience. This determination of data segmentation and actuarial methods is carefully considered for each class of
business. The segmentation and actuarial methods chosen are those which together are expected to produce the
most robust estimate of the loss reserves.
The actuarial methods we use for most long-tail casualty classes of business include loss development
methods, expected loss ratio methods, including ‘‘Bornhuetter Ferguson’’ methods described below, and
frequency/severity models. Loss development methods utilize the actual loss development patterns from prior
accident years to project the reported losses to an ultimate basis for subsequent accident years. Loss development
methods generally are most appropriate for classes of business which exhibit a stable pattern of loss development
from one accident year to the next, and for which the components of the classes have similar development
characteristics. For example, property exposures would generally not be combined into the same class as casualty
exposures, and primary casualty exposures would generally not be combined into the same class as excess casualty
exposures. In 2013, we continued to refine our loss reserving techniques for the domestic primary casualty classes of
business and adopted further segmentations based on our analysis of the differing emerging loss patterns for certain
classes of insureds. We generally use expected loss ratio methods in cases where the reported loss data lacks
sufficient credibility to utilize loss development methods, such as for new classes of business or for long-tail classes
at early stages of loss development. Frequency/severity models may be used where sufficient frequency counts are
available to apply such approaches.
Expected loss ratio methods rely on the application of an expected loss ratio to the earned premium for the
class of business to determine the loss reserves. For example, an expected loss ratio of 70 percent applied to an
earned premium base of $10 million for a class of business would generate an ultimate loss estimate of $7 million.
Subtracting any reported paid losses and loss expense would result in the indicated loss reserve for this class. Under
the ‘‘Bornhuetter Ferguson’’ methods, the expected loss ratio is applied only to the expected unreported portion of
Actuarial and Other Methods for Major Classes of Business
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AIG 2013 Form 10-K182
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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