AmazonScience/document-haystack

1The reserve analysis, globally, for each product line of business is performed by a credentialed actuarial team in collaboration with 2claims, underwriting, business unit management, risk management and senior management. Our actuaries consider the ongoing 3applicability of prior data groupings and update numerous assumptions, including the analysis and selection of loss development and 4loss trend factors. They also determine and select the appropriate actuarial or other methods used to develop our best estimate for 5each business product line, and may employ multiple methods and assumptions for each product line. These data groupings, accident 6year weights, method selections and assumptions necessarily change over time as business mix changes, development factors 7mature and become more credible and loss characteristics evolve. We consult with third-party specialists to help inform our 8judgments as needed. Through the execution of these detailed valuation reviews an actuarial best estimate of the loss reserve is 9determined. The sum of these estimates for each product line of business yields an overall actuarial best estimate for that line of 10business.11A critical component of our detailed valuation reviews is an internal peer review of our reserving analyses and conclusions, where 12actuaries independent of the initial review evaluate the reasonableness of assumptions used, methods selected, and weightings given 13to different methods. In addition, each detailed valuation review is subjected to a review and challenge process by specialists in our 14Enterprise Risk Management (ERM) group.15For certain product lines, we measure sensitivities and determine explicit ranges around the actuarial best estimate using multiple 16methodologies and varying assumptions. Where we have ranges, we use them to inform our selection of best estimates of loss 17reserves by product line of business. Our range of reasonable estimates is not intended to cover all possibilities or extreme values 18and is based on known data and facts at the time of estimation.19Actuarial and Other Methods for Our Lines of Business20Our actuaries determine the appropriate actuarial methods and segmentation. This determination is based on a variety of 21factors including the nature of the losses associated with the product line of business, such as the frequency or severity of the claims. 22In addition to determining the actuarial methods, the actuaries determine the appropriate loss reserve groupings of data. This 23determination is a judgmental, dynamic process and refinements to the groupings are made every year. The groupings may change to 24reflect observed or emerging patterns within and across product lines, or to differentiate risk characteristics (for example, size of 25deductibles and extent of third-party claims specialists used by our insureds). As an example of reserve segmentation, we write many 26unique subsets of professional liability insurance, which cover different products, industry segments, and coverage structures. While 27for pricing or other purposes, it may be appropriate to evaluate the profitability of each subset individually, we believe it is appropriate 28to combine the subsets into larger groups for reserving purposes to produce a greater degree of credibility in the loss experience. This 29determination of data segmentation and related actuarial methods is assessed, reviewed and updated at least annually.30The actuarial methods we use most commonly include paid and incurred loss development methods, expected loss ratio 31methods, including “Bornhuetter Ferguson” and “Cape Cod,” and frequency/severity models. Loss development methods 32utilize the actual loss development patterns from prior accident years updated through the current year to project the reported losses 33to an ultimate basis for all accident years. We also use this information to update our current accident year loss selections. Loss 34development methods are generally most appropriate for lines of business that exhibit a stable pattern of loss development from one 35accident year to the next, and for which the components of the product line have similar development characteristics. Expected loss 36ratio methods rely on the application of an expected loss ratio to the earned premium for the product line of business to 37determine the liability for loss reserves and loss adjustment expenses. We generally use expected loss ratio methods in cases 38where the reported loss data lacked sufficient credibility to utilize loss development methods, such as for new product lines of 39business or for long-tail product lines at early stages of loss development. Frequency/severity models may be used where sufficient 40frequency counts are available to apply such approaches.41A key advantage of loss development methods is that they respond more quickly to any actual changes in loss costs for the product 42line of business. Therefore, if loss experience is unexpectedly deteriorating or improving, the loss development method gives full 43credibility to the changing experience. Expected loss ratio methods would be slower to respond to the change, as they would continue 44to give more weight to a prior expected loss ratio, until enough evidence emerged to modify the expected loss ratio to reflect the 45changing loss experience. On the other hand, loss development methods have the disadvantage of overreacting to changes in 46reported losses if the loss experience is anomalous due to the various key factors described above and the inherent volatility in some 47of the lines. For example, the presence or absence of large losses at the early stages of loss development could cause the loss 48development method to overreact to the favorable or unfavorable experience by assuming it is a fundamental shift in the development 49pattern. In these instances, expected loss ratio methods such as Bornhuetter Ferguson have the advantage of recognizing large 50losses without extrapolating unusual large loss activity onto the unreported portion of the losses for the accident year.51ITEM 7 | Critical Accounting Estimates5250 AIG | 2023 Form 10-K