AIG 2014 Annual Report Download - page 196

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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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, such as property, the process for recording non-catastrophe quarterly loss
reserves is generally geared toward maintaining incurred but not reported reserves based on percentages of net earned
premiums for that business, rather than determining an ultimate loss ratio for current business based on reported losses. For
example, the IBNR reserve required for the latest accident quarter for a class of property business might be expected to
approximate 20 percent of the most recent quarter’s earned premiums. This level of reserve would generally be maintained
regardless of the actual losses emerging in the current quarter. The percent of premium factor would reflect both the expected
ultimate cost for reported claims and the expected percentage of losses that have not yet been reported. The expected
ultimate loss costs generally reflect the average loss ratio from a period of preceding years 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 losses that have not yet been reported would be derived from
historical loss emergence patterns. IBNR for claims arising from catastrophic events or events of unusual severity would be
determined using alternative techniques in close collaboration with the claims department. For some classes, a loss
development factor method or percentage of monthly losses method may be used to determine IBNR reserves.
Long-Tail Reserves
Estimation of ultimate net losses and loss adjustment expenses (net losses) for
long-tail casualty classes of business is a complex process and depends on a
number of factors, including the class and volume of business, as well as estimates of
the reinsurance recoverable. Experience in the more recent accident years shows
limited statistical credibility in reported net losses on long-tail casualty classes of
business. That is because a relatively low proportion of net incurred losses represent
reported claims and expenses, and an even smaller percentage represents net losses
paid. Therefore, IBNR constitutes a relatively high proportion of net losses.
To estimate net losses for
long-tail casualty classes
of business, we
use a variety of actuarial
methods and assumptions.
To estimate net losses for long-tail casualty classes of business, we use a variety of actuarial methods and assumptions
and other analytical techniques as described below. A detailed reserve review is generally performed at least once per year to
allow for comprehensive actuarial evaluation and collaboration with claims, underwriting, business unit management, risk
management and senior management.