AIG 2011 Annual Report Download - page 105

During the fourth quarter of 2010, AIG conducted its comprehensive loss reserve analysis using a variety of
actuarial techniques to project future loss development for this very long-tail class. As part of this analysis, AIG
compared and contrasted the traditional techniques that have been used for this class with an alternative approach
that focuses more explicitly on projecting the effect of future calendar year trends, placing less weight on prior-
period loss development ratios due to the increased evidence of changes to the claims environment. To this end,
AIG engaged a third-party actuary that uses such alternative approaches to supplement the extensive analysis
performed by AIG as it conducted its comprehensive loss review of its year-end loss reserves. The third-party
actuary provided an additional perspective for the excess workers’ compensation class by using a method that
management considered to be particularly suited to the excess workers’ compensation class, given its long-tail
nature. These various actuarial analyses all indicated a substantial increase in loss estimates from the prior-year
level. AIG responded to this increased loss indication by evaluating a range of loss development scenarios
including developing the tail factors that extrapolate the claims projections as far as 40 years into the future. Due
to the extremely long-tail nature of this class, the impact of the selected change in loss development assumptions
affected many accident years and led to an overall strengthening of approximately $825 million, before discount.
Approximately $430 million of the reserve strengthening in the fourth quarter of 2010 pertained to accident years
1999 and prior, with an additional $160 million attributable to accident year 2000, $140 million to accident year
2001, $80 million to accident year 2002, and only approximately $10 million attributable to 2003 and subsequent
years.
For the year-end 2009 loss reserve review, AIG increased the loss development assumptions for this class of
business, resulting in approximately a $925 million increase in reserves. The increased loss development
assumptions were based on an additional actuarial study performed by AIG in response to the emergence of
losses in accident years 1999 and prior. This study analyzed the development patterns emanating from the AIG
claims staff projections of expected ultimate cost for each open claim.
Director and Officer (D&O) and Related Management Liability Classes of Business
D&O and Related Management Liability Classes of Business Background
Loss reserves pertaining to D&O and related management liability classes of business are included in the Other
liability claims made line of business, as presented in the loss reserves by major lines of business table above. AIG
experienced favorable development in 2011, 2010 and 2009. The favorable development over the three-year period
related primarily to accident years 2005-2007, 2010, and, to a lesser extent, accident years 2001 and 2002.
D&O and Related Management Liability Classes of Business Discussion and Analysis
Loss cost trends for D&O and related management liability classes of business were adverse in accident years
2002 and prior due to a variety of factors, including an increase in frequency and severity of corporate
bankruptcies; the increase in the frequency of financial restatements; the sharp rise in market capitalization of
publicly traded companies; and the increase in the number of initial public offerings. The 2003 through 2006
period was marked by a significant reduction in claims related to these factors; thus the expected loss ratios
initially established for these accident years have developed favorably, particularly for 2004 and 2005. Beginning in
accident year 2007, claims relating to the credit crisis resulted in increased overall claim activity. This increase in
claim activity began to subside for accident years 2008 and subsequent, with a reduction in credit crisis related
claim activity and a decrease in the higher severity securities class action claims in the more recent accident years.
AIG utilizes ground-up claims projections by AIG claims staff as a benchmark to select the loss reserves for this
business; these projections are updated annually.
For the year-end 2011 loss reserve review, AIG’s actuaries took into account the favorable development for
accident years 2011, 2010 and 2003 through 2008 as well as the continuing favorable development observed in the
ground up claim projections by AIG claims staff over the past five years. This favorable development was partially
offset by adverse development for accident year 2009.
For the year-end 2010 loss reserve review, AIG’s actuaries took into account the favorable development from
prior accident years, as well as the continuing favorable development observed in the ground-up claims projections
AIG 2011 Form 10-K 91