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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................Class of Business or Category and Actuarial MethodApplication of Actuarial MethodExcess Workers’ CompensationWe historically have used a combination of loss development Excess workers’ compensation is an extremely long-tail classmethods and expected loss ratio methods for excess workers’ of business, with loss emergence extending for decades. Thecompensation. For the year-end 2012 loss reserve review, our class is highly sensitive to small changes in assumptions – inactuaries supplemented the methods used historically bythe rate of medical inflation or the longevity of injured workers,applying a structural drivers approach to inform their judgment for example – which can have a significant effect on theof the ultimate loss costs for open reported claims fromultimate reserve estimate. Claims estimates for this line alsoaccident years 2003 and prior (representing approximately are highly sensitive to:95% of all open reported claims) and used the refined• the assumed future rate of inflation and other economicanalysis to inform their judgment of the ultimate loss cost forconditions in the United States;claims that have not yet been reported using a frequency/severity approach for these accident years. • changes in the legal, regulatory, judicial and socialenvironment;• the expected impact of recently enacted health care reformon workers’ compensation costs;• underlying policy pricing, terms and conditions;• claims settlement trends that can materially alter the mixand ultimate cost of claims;• changes in claims reporting and management practices ofinsureds and their third-party administrators;• the cost of new and additional treatment specialties, suchas ‘‘pain management’’;• the propensity for severely injured workers’ medicalconditions to deteriorate in the future;• changes in injured worker longevity; and• territorial experience differences (across states and withinregions in a state).Expected loss ratio methods are given the greater weight forthe more recent accident years. For the year-end 2012 lossreserve review, the structural drivers approach which wasapplied to open reported claims from accident years 2003 andprior, was deemed to be most suitable for informing ourjudgment of the ultimate loss cost for injured workers whosemedical conditions had largely stabilized (i.e., at least 9 to10 years have elapsed since the date of injury). The reservefor unreported claims is approximately 41 percent of the totalestimated reserve requirement for accident years 2003 andprior. The reserve for accident years 2004 and subsequentwas determined using a Bornhuetter Ferguson expected lossratio method and constitute approximately 13 percent of thetotal reserve requirements for this class of business........................................................................................................................................................................................................................................................................................................................................................................................................................................................AIG 2012 Form 10-K 181