AIG 2005 Annual Report Download - page 58

AIG’s General Insurance company subsidiaries worldwide Discussion and Analysis of Consolidated Net Losses
operate primarily by underwriting and accepting risks for their and Loss Expense Reserve Development
direct account and securing reinsurance on that portion of the The reserve for net losses and loss expenses represents the
risk in excess of the limit which they wish to retain. This accumulation of estimates for reported losses (case basis
operating policy differs from that of many insurance companies reserves) and provisions for losses incurred but not reported
that will underwrite only up to their net retention limit, thereby (IBNR), both reduced by applicable reinsurance recoverable
requiring the broker or agent to secure commitments from other and the discount for future investment income. Losses and loss
underwriters for the remainder of the gross risk amount. expenses are charged to income as incurred.
Certain of DBG’s commercial insurance is reinsured on a Loss reserves established with respect to foreign business are
quota share basis by AIRCO. Various AIG profit centers, set and monitored in terms of the respective local or functional
including AIU, AIG Reinsurance Advisors, Inc. and AIG Risk currency. Therefore, no assumption is included for changes in
Finance, use AIRCO as a reinsurer for certain of their currency rates. See also Note 1(bb) of Notes to Consolidated
businesses, and AIRCO also receives premiums from offshore Financial Statements.
fronting arrangements for clients of AIG subsidiaries. In Management reviews the adequacy of established loss
accordance with permitted accounting practices in Bermuda, reserves through the utilization of a number of analytical
AIRCO discounts reserves attributable to certain classes of reserve development techniques. Through the use of these
business assumed from other AIG subsidiaries. See Manage- techniques, management is able to monitor the adequacy of
ment’s Discussion and Analysis of Financial Condition and AIG’s established reserves and determine appropriate assump-
Results of Operations – ‘‘Operating Review – Reserve for Losses tions for inflation. Also, analysis of emerging specific develop-
and Loss Expenses.’’ ment patterns, such as case reserve redundancies or deficiencies
The utilization of reinsurance is closely monitored by senior and IBNR emergence, allows management to determine any
management and AIG’s Credit Risk Committee. AIG believes required adjustments. See also Management’s Discussion and
that no exposure to a single reinsurer represents an inappropri- Analysis of Financial Condition and Results of Operations.
ate concentration of risk to AIG, nor is AIG’s business The ‘‘Analysis of Consolidated Net Losses and Loss Expense
substantially dependent upon any reinsurance contract. See Reserve Development’’ table presents the development of net
also Management’s Discussion and Analysis of Financial losses and loss expense reserves for calendar years 1995 through
Condition and Results of Operations and Note 5 of Notes to 2005. Immediately following this table is a second table that
Consolidated Financial Statements. presents all data on a basis that excludes asbestos and
AIG is diversified both in terms of classes of business and environmental net losses and loss expense reserve development.
geographic locations. In General Insurance, approximately The opening reserves held are shown at the top of the table
15 percent of net premiums written for the year ended for each year end date. The amount of loss reserve discount
December 31, 2005 represented workers compensation business. included in the opening reserve at each date is shown
During 2005, of the direct General Insurance premiums written immediately below the reserves held for each year. The
(gross premiums less return premiums and cancellations, undiscounted reserve at each date is thus the sum of the
excluding reinsurance assumed and before deducting reinsur- discount and the reserve held. The upper half of the table
ance ceded), 11 percent and 7 percent were written in shows the cumulative amounts paid during successive years
California and New York, respectively. No other state ac- related to the undiscounted opening loss reserves. For example,
counted for more than five percent of such premiums. in the table that excludes asbestos and environmental losses,
The majority of AIG’s General Insurance business is in the with respect to the net losses and loss expense reserve of
casualty classes, which tend to involve longer periods of time $24.55 billion as of December 31, 1998, by the end of 2005
for the reporting and settling of claims. This may increase the (seven years later) $24.75 billion had actually been paid in
risk and uncertainty with respect to AIG’s loss reserve settlement of these net loss reserves. In addition, as reflected in
development. See also the Discussion and Analysis of Consoli- the lower section of the table, the original reserve of
dated Net Losses and Loss Expense Reserve Development in $25.45 billion was reestimated to be $30.64 billion at
this Item 1. Business and Management’s Discussion and December 31, 2005. This increase from the original estimate
Analysis of Financial Condition and Results of Operations. would generally result from a combination of a number of
A significant portion of AIG’s General Insurance operating factors, including reserves being settled for larger amounts than
revenue is derived from AIG’s insurance investment operations. originally estimated. The original estimates will also be
For a table summarizing the investment results of General increased or decreased as more information becomes known
Insurance see ‘‘Insurance Investments Operations’’ below. See about the individual claims and overall claim frequency and
also Management’s Discussion and Analysis of Financial severity patterns. The redundancy (deficiency) depicted in the
Conditions and Results of Operations and Notes 1, 2 and 8 of table, for any particular calendar year, shows the aggregate
Notes to Consolidated Financial Statements.
6AIG m Form 10-K