AIG 2015 Annual Report Download - page 206

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES

206
Class of Business or Category and Actuarial Method Application of Actuarial Method
Mortgage Guaranty
We test mortgage guaranty reserves using loss
development methods, supplemented by an internal
claim analysis by actuaries and staff who specialize in
the mortgage guaranty business.
The reserve analysis projects ultimate losses for
claims within each of several reserving categories
based on actual historical experience, using primarily a
frequency/severity loss development approach.
Additional reserve tests are also employed, such as
tests measuring the trend of losses as a percent of risk
in force. Reserves are reviewed separately for each
line of business considering the loss development
characteristics, volume of claim data available and
applicability of various actuarial methods to each line.
Reserves for mortgage guaranty insurance losses and
loss adjustment expenses are established for reported
mortgage loan delinquencies and estimates of
delinquencies that have been incurred but have not
been reported by loan servicers, based upon historical
reporting trends. We establish reserves using a
percentage of the contractual liability (for each
delinquent loan reported) that is based upon projected
claim experience for each category of delinquency,
consistent in total with the overall reserve estimate.
Mortgage Guaranty losses and loss adjustment
expenses have been affected by macroeconomic
events, such as improving home prices and decreasing
unemployment. Because these macroeconomic events
are subject to adverse or favorable change, the
determination of the ultimate losses and loss
adjustment expenses requires a high degree of
judgment. Improving economic conditions have
produced higher cure rates of delinquent loans in
recent years, a trend that may not continue in 2016. In
addition, loans with modifications through government
and lender programs may re-default resulting in new
losses for Mortgage Guaranty if adverse economic
conditions were to return. In addition to improved cure
rates, the favorable economic trends have resulted in a
decline of newly reported delinquencies. Partially
offsetting these favorable frequency trends was a lower
incidence of denied and rescinded claims.