AIG 2014 Annual Report Download - page 210

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Class of Business or Category and Actuarial Method Application of Actuarial Method
International
Business written by the Non-Life Insurance Companies
internationally includes both long-tail and short-tail
classes of business. For long-tail classes of business,
the actuarial methods used are comparable to those
described above. However, the majority of business
written by the Non-Life Insurance Companies
internationally is short-tail, high frequency and low
severity in nature. For this business, loss development
methods are generally employed to test the loss
reserves.
We maintain a database of detailed historical premium
and loss transactions in original currency for business
written by the Non-Life Insurance Companies
internationally. This allows our actuaries to determine
the current reserves without any distortion from
changes in exchange rates over time. Our actuaries
segment the international data by region, country or
class of business as appropriate to determine an
optimal balance between homogeneity and credibility.
The techniques developed by our U.S. actuaries for
certain commercial classes of business are
increasingly applied to our International portfolios
where the experience volume and data segmentation
is comparable to that of the U.S. portfolios. Our
actuaries work closely with the claims departments in
each of our major International locations to determine
the most appropriate methodology and assumptions.
Loss Adjustment Expenses
We determine reserves for legal defense and cost
containment loss adjustment expenses for each class
of business by one or more actuarial or structural
driver methods. The methods generally include
development methods comparable to those described
for loss development methods. The development could
be based on either the paid loss adjustment expenses
or the ratio of paid loss adjustment expenses to paid
losses, or both. Other methods include the utilization of
expected ultimate ratios of paid loss expense to paid
losses, based on actual experience from prior accident
years or from similar classes of business.
We generally determine reserves for adjuster loss
adjustment expenses based on calendar year ratios of
adjuster expenses paid to losses paid for the particular
class of business. We generally determine reserves for
other unallocated loss adjustment expenses based on
the ratio of the calendar year expenses paid to overall
losses paid. This determination is generally done for all
classes of business combined, and reflects costs of
home office claim overhead as a percent of losses
paid. We may supplement our judgments with an
analysis of loss and legal expense mix change using
predictive models that explicitly represent such mix
change and detailed reviews with the claims
department on the methods used to allocate the costs
of the claims initiatives to new and in-force business
and to different classes and sub-classes of business.
Catastrophes and Severe Losses
We conduct special analyses in response to major
catastrophes and severe losses to estimate our gross
and net liability for unpaid losses and loss adjustment
expenses from those events.
These analyses may include a combination of
approaches, including modeling estimates, ground-up
claim analysis, loss evaluation reports from on-site
field adjusters, and market share estimates.
Alternative Loss Cost Trend and Loss Development Factor Assumptions by Class of Business
For classes of business other than the classes discussed below, there is generally some potential for deviation in both the loss
cost trend and loss development factor assumptions.
The effect of these deviations is expected to be smaller than the effect on the classes noted below:
Loss cost trends: The percentage deviations noted in the table below are not considered the highest possible deviations that
might be expected, but rather what we consider to reflect a reasonably likely range of potential deviation. The impacts cited