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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................With respect to known environmental claims, we established over two decades ago a specialized environmentalclaims unit, which investigates and adjusts all such environmental claims. This unit evaluates environmental claimsutilizing a claim-by-claim approach that involves a detailed review of individual policy terms and exposures. Becauseeach policyholder presents different liability and coverage issues, we generally evaluate exposure on apolicy-by-policy basis, considering a variety of factors such as known facts, current law, jurisdiction, policy languageand other factors that are unique to each policy. Quantitative techniques must be supplemented by subjectiveconsiderations, including management judgment. Each claim is reviewed at least semi-annually utilizing theaforementioned approach and adjusted as necessary to reflect the current information.The environmental claims unit also actively manages and pursues early resolution with respect to these claims in anattempt to mitigate its exposure to the unpredictable development of these claims. We attempt to mitigate our knownlong-tail environmental exposures through a combination of proactive claim-resolution techniques, including policybuybacks, complete environmental releases, compromise settlements, and, when appropriate, litigation.Known asbestos claims are managed in a similar manner. Over two decades ago we established a specialized toxictort claims unit, which historically investigated and adjusted all such asbestos claims. As part of the above mentionedNICO transaction, effective January 1, 2011, NICO assumed responsibility for claims handling related to the majorityof AIG’s domestic asbestos liabilities.The following is a discussion of actuarial methods applied by major class of business:Class of Business or Category and Actuarial MethodApplication of Actuarial MethodExcess CasualtyWe generally use a combination of loss development methods Expected loss ratio methods are generally used for at leastand expected loss ratio methods for excess casualty classes. the three latest accident years, due to the relatively lowcredibility of the reported losses. The loss experience isFrequency/severity methods are generally not used in isolationgenerally reviewed separately for lead umbrella classes andto determine ultimate loss costs as the vast majority offor other excess classes, due to the relatively shorter tail forreported claims do not result in claim payment. (However,lead umbrella business. Automobile-related claims arefrequency/severity methods assist in the regular monitoring ofgenerally reviewed separately from non-auto claims, due tothe adequacy of carried reserves to support incurred but notthe shorter-tail nature of the automobile-related claims. Claimsreported claims). In addition, the average severity variesrelating to certain latent exposures such as constructionsignificantly from accident year to accident year due to largedefects or exhaustion of underlying product aggregate limitslosses which characterize this class of business, as well asare reviewed separately due to the unique emergencechanging proportions of claims which do not result in a claimpatterns of losses relating to these claims. The expected losspayment. In order to gain more stability in the projection, theratios used for recent accident years are based on theclaims amenable to loss development methods are analyzedprojected ultimate loss ratios of prior years, adjusted for ratein two layers: the layer capped at $10 million and the layerchanges, estimated loss cost trends and all other changesabove $10 million. The expected loss ratio for the layer abovethat can be quantified.$10 million is derived from the expected relationship betweenthe layers, reflecting the attachment point and limit byDuring 2012, we also completed a third party review of certainaccident year.insureds exposed to a specific class of toxic tort claims. Thatreview considered the prior claims history for each insuredIn addition, we leverage case reserving based methodologiesaccount, AIG’s exposed limits and the insured’s role with thefor complex claims/ latent exposures such as those involvingspecific toxicant reviewed as well as a legal analysis of thetoxic tort and other claims accumulations.exposures presented by these claims........................................................................................................................................................................................................................................................................................................................................................................................................................................................AIG 2012 Form 10-K 179