AmazonScience/document-haystack

1The Cape Cod method is a hybrid between the loss development and Bornhuetter Ferguson methods, where the historic loss data 2and loss development factor assumptions are used to determine the expected loss ratio estimate in the Bornhuetter Ferguson 3method.4Where appropriate, supplemental analysis for the given line of business may be performed in addition to the above described 5techniques such as Shareholder Class Action suit analysis for Directors and Officers (D&O) coverages.6Frequency/severity methods generally rely on the determination of an ultimate number of claims and an average severity for 7each claim for each accident year. Multiplying the estimated ultimate number of claims for each accident year by the expected 8average severity of each claim produces the estimated ultimate loss for the accident year. Frequency/severity methods generally 9require a sufficient volume of claims in order for the average severity to be predictable. Average severity for subsequent accident 10years is generally determined by applying an estimated annual loss cost trend to the estimated average claim severity from prior 11accident years. In certain cases, a structural approach may also be used to predict the ultimate loss cost. Frequency/severity methods 12have the advantage that ultimate claim counts can generally be estimated more quickly and accurately than can ultimate losses. 13Thus, if the average claim severity can be accurately estimated, these methods can more quickly respond to changes in loss 14experience than other methods. However, for average severity to be predictable, the product line of business must consist of 15homogenous types of claims for which loss severity trends from one year to the next are reasonably consistent and where there are 16limited changes to deductible levels or limits. Generally these methods work best for high frequency, low severity product lines of 17business such as personal auto. However, frequency and severity metrics are also used to test the reasonability of results for other 18product lines of business and provide indications of underlying trends in the data. In addition, ultimate claim counts can be used as an 19alternative exposure measure to earned premiums in the Cape Cod method.20The estimation of liability for loss reserves and loss adjustment expenses relating to asbestos and environmental pollution 21losses on insurance policies written many years ago is typically subject to greater uncertainty than other types of losses. 22This is due to inconsistent court decisions, as well as judicial interpretations and legislative actions that in some cases have tended to 23broaden coverage beyond the original intent of such policies or have expanded theories of liability. In addition, reinsurance 24recoverable balances relating to asbestos and environmental loss reserves are subject to greater uncertainty due to the underlying 25age of the claim, underlying legal issues surrounding the nature of the coverage, and determination of proper policy period. For these 26reasons, these balances tend to be subject to increased levels of disputes and legal collection activity when actually billed. The 27insurance industry as a whole is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a 28continuing uncertainty in its efforts to quantify these exposures.29We continue to receive claims asserting injuries and damages from toxic waste, hazardous substances, and other environmental 30pollutants and alleged claims to cover the cleanup costs of hazardous waste dump sites, referred to collectively as environmental 31claims, and indemnity claims asserting injuries from asbestos. The vast majority of these asbestos and environmental losses emanate 32from policies written in 1984 and prior years. Commencing in 1985, standard policies contained absolute exclusions for pollution-33related damage and asbestos. The current environmental policies that we specifically price and underwrite for environmental risks on 34a claims-made basis have been excluded from the analysis. Nevertheless, most of these legacy exposures have been heavily 35reinsured with very highly rated reinsurers.36The majority of our remaining exposures for asbestos and environmental losses are related to excess casualty coverages, not primary 37coverages. The litigation costs are treated in the same manner as indemnity amounts, with litigation expenses included within the 38limits of the liability we incur. Individual significant loss reserves, where future litigation costs are reasonably determinable, are 39established on a case-by-case basis.40ITEM 7 | Critical Accounting Estimates41AIG | 2023 Form 10-K 51