AIG 2015 Annual Report Download - page 193

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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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 represents
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.
We generally make a number of actuarial assumptions in the review of reserves for each class of business.
For longer-tail classes of business, we generally make actuarial assumptions with respect to the
following:
• Loss cost trend factors which are used to establish expected loss ratios for subsequent accident years based on the
projected loss ratios for prior accident years.
• Expected loss ratios for the latest accident year (i.e., accident year 2015 for the year-end 2015 loss reserve
analysis) and, in some cases for accident years prior to the latest accident year. The expected loss ratio generally
reflects the projected loss ratio from prior accident years, adjusted for the loss trend and the effect of rate changes and
other quantifiable factors on the loss ratio. For low-frequency, high-severity classes such as excess casualty, expected
loss ratios generally are used for at least the three most recent accident years.
• Loss development factors which are used to project the reported losses for each accident year to an ultimate basis.
Generally, the actual loss development factors observed from prior accident years would be used as a basis to
determine the loss development factors for the subsequent accident years.
We record quarterly changes in loss reserves for each of the Non-Life Insurance Companies classes of business. The
overall change in our loss reserves is based on the sum of the changes for all classes of business. For most long-tail classes
of business, the quarterly loss reserve changes are based on the estimated current loss ratio for each class of coverage less
any amounts paid. Also, any change in estimated ultimate losses from prior accident years deemed to be necessary based on
the results of our latest reserve studies or large loss analysis, either positive or negative, is reflected in the loss reserve for the
current quarter. Differences between actual loss emergence in a given period compared to our expectations may also
influence our judgment with respect to reserve adequacy.