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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................In some of our estimation processes we rely on the claims department estimates of our case reserves as an input toour best estimate of the ultimate loss cost.Overview of Loss Reserving Process and MethodsAIG Property Casualty loss reserves can generally be categorized into two distinct groups. Short-tail classes ofbusiness consist principally of property, personal lines and certain casualty classes. Long-tail casualty classes ofbusiness include excess and umbrella liability, D&O, professional liability, medical malpractice, workers’compensation, general liability, products liability and related classes.Short-Tail ReservesFor operations writing short-tail coverages, such as property coverages, the process of recording quarterly lossreserves is generally geared toward maintaining an appropriate reserve for the outstanding exposure, rather thandetermining an expected loss ratio for current business. For example, the IBNR reserve required for a class ofproperty business might be expected to approximate 20 percent of the latest year’s earned premiums. This level ofreserve would generally be maintained regardless of the loss ratio emerging in the current quarter. The 20 percentfactor would be adjusted to reflect changes in rate levels, loss reporting patterns, known exposure to unreportedlosses, or other factors affecting the particular class of business. For some classes, a loss development factormethod may be used.Long-Tail ReservesEstimation of ultimate net losses and loss expenses (net losses) forlong-tail casualty classes of business is a complex process anddepends on a number of factors, including the class and volume ofbusiness, as well as estimates of the reinsurance recoverable. Experiencein the more recent accident years shows limited statistical credibility inreported net losses on long-tail casualty classes of business. That isbecause a relatively low proportion of net incurred losses representreported claims and expenses, and an even smaller percentage representnet losses paid. Therefore, IBNR constitutes a relatively high proportion ofnet losses.To estimate net losses forlong-tail casualty classes ofbusiness, we use a variety ofactuarial methods andassumptions.To estimate net losses for long-tail casualty classes of business, we use a variety of actuarial methods andassumptions and other analytical techniques as described below. A detailed reserve review is generally performed atleast 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...................................................................................................................................................................................................................................174 AIG 2012 Form 10-K