AIG 2014 Annual Report Download - page 202

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 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 $1 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 2014, we estimated the loss development
patterns for mass tort claims separately from non-mass
tort claims based on our experience over the last 30
years. This segmentation led to lower estimates for
accident years 2005 and subsequent for non-mass tort
claims where we expect underwriting actions and
reductions in policy limits to have a favorable effect on
ultimate losses, particularly for accident years 2007 to
2013. This was entirely offset by higher selected
ultimates for accident years 2004 and prior as a result of
this segmentation.
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. Expected loss ratio
methods are given more weight in the two most recent
accident years, whereas loss development methods are
given more weight in more mature accident years. For
the year-end 2014 loss reserve review, claims
projections for accident years 2013 and prior were used.