AIG 2015 Annual Report Download - page 296

ITEM 8 / NOTE 12. INSURANCE LIABILITIES
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estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time
is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of
ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease
previous estimates of ultimate cost are referred to as favorable development.
Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from
policyholders of approximately $12.6 billion and $12.4 billion at December 31, 2015 and 2014, respectively. These recoverable
amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through
self-insured retentions or deductibles each referred to generically as “deductibles”), primarily for U.S. commercial casualty
business. With respect to the deductible portion of the claim, the Non-life Insurance Companies manage and pay the entire
claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. At December 31, 2015
and 2014, we held collateral of approximately $9.6 billion and $9.4 billion, respectively, for these deductible recoverable
amounts, consisting primarily of letters of credit and trust agreements.
The following table presents the reconciliation of activity in the Liability for unpaid losses and loss adjustment
expenses:
Years Ended December 31,
(in millions) 2015 2014 2013
Liability for unpaid losses and loss adjustment expenses, beginning of year $77,260 $ 81,547 $ 87,991
Reinsurance recoverable (15,648) (17,231) (19,209)
Net liability for unpaid losses and loss adjustment expenses, beginning of year 61,612 64,316 68,782
Foreign exchange effect (1,429) (1,061) (617)
Dispositions - - (79)
Changes in net loss reserves due to retroactive asbestos reinsurance transaction 20 141 22
Tot al 60,203 63,396 68,108
Losses and loss adjustment expenses incurred:
Current year 20,308 21,279 22,171
Prior years, excluding discount 4,119 703 557
Prior years, discount charge (benefit) (71) 478 (309)
Tot al 24,356 22,460 22,419
Losses and loss adjustment expenses paid*:
Current year 5,751 6,358 7,431
Prior years 18,205 17,886 18,780
Tot al 23,956 24,244 26,211
Balance, end of year:
Net liability for unpaid losses and loss adjustment expenses 60,603 61,612 64,316
Reinsurance recoverable 14,339 15,648 17,231
Tot al $74,942 $ 77,260 $ 81,547
* Includes amounts related to dispositions through the date of disposition.
The net adverse development includes loss-sensitive business, for which we recognized (return) additional premiums on loss
sensitive business of $(49) million, $105 million and $89 million for the years ended December 31, 2015, 2014and 2013,
respectively.
Each quarter, we conduct a series of actuarial reviews to reassess the reasonableness of our carried reserves. These reviews
are conducted for each class of business, and consist of hundreds of individual analyses. We consider data and information
arising since the prior review and adjust, as appropriate, the methods and assumptions used in the latest actuarial reviews.
Our analyses produce a range of indications from various methods, from which we select our best estimate.
For 2015, the adverse development of prior year losses is primarily a result of the following:
 Excess Casualty – U.S. & Canada experienced $1.5 billion of adverse development largely driven by worse than expected
loss emergence reported in 2015, reflecting worsening trends in the number and nature of high severity losses in both