AIG 2014 Annual Report Download - page 36

ITEM 1 / BUSINESS
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19
A REVIEW OF LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses (also referred to as loss reserves) represents the accumulation of
estimates for unpaid reported losses (case reserves) and losses that have been incurred but not reported (IBNR) for the Non-
Life Insurance Companies.
We recognize as assets the portion of this liability that is expected to be recovered from reinsurers. Loss reserves are
discounted, where permitted, in accordance with U.S. GAAP.
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 established net
liability for unpaid losses and loss adjustment expenses (net loss reserves). Using
these analytical techniques, we monitor the adequacy of our established reserves
and determine appropriate assumptions for inflation and other factors influencing
loss costs. Our analyses also take into account emerging specific development
patterns, such as case reserve redundancies or deficiencies and IBNR emergence.
We also consider specific factors that may impact losses, such as changing trends
in medical costs, unemployment levels and other economic indicators, as well as
changes in legislation and social attitudes that may affect decisions to file claims or
the magnitude of court awards. See Item 7. MD&A — Critical Accounting Estimates
for a description of our loss reserving process.
Because reserve estimates are
subject to the outcome of future
events, changes in prior year
estimates are unavoidable in the
insurance industry. These changes
in estimates are sometimes referred
to as “prior year loss development”
or “reserve development.”
A significant portion of the Non-Life Insurance Companies’ reserves are for the U.S. commercial casualty class, including
excess casualty, asbestos and environmental, which tends to involve longer periods of time for the reporting and settlement of
claims than other types of insurance and therefore may increase the inherent risk and uncertainty with respect to our loss
reserve development.
Analysis of Consolidated Loss Reserve Development
The “Analysis of Consolidated Loss Reserve Development” table presents the development of prior year net loss reserves for
calendar years 2004 through 2014 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 losses and loss 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 $48.8 billion at December 31, 2004.
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