AIG 2011 Annual Report Download - page 115

Class of Business or Category and Actuarial Method Application of Actuarial Method
Short-Tail Classes
AIG generally uses either loss development methods or Where a factor is used, it generally represents a percent of
IBNR factor methods to set reserves for short-tail classes such earned premium or other exposure measure. The factor is
as property coverages. determined based on prior accident year experience. For
example, the IBNR for a class of property coverage might be
expected to approximate 20 percent of the latest year’s earned
premium. The factor is continually reevaluated in light of
emerging claim experience as well as rate changes or other
factors that could affect the adequacy of the IBNR factor
being employed.
International
Business written by Chartis internationally includes both AIG maintains a database of detailed historical premium
long-tail and short-tail classes of business. For long-tail classes and loss transactions in original currency for business written
of business, the actuarial methods used are analogous to those by Chartis internationally, thereby allowing AIG actuaries to
described above. However, the majority of business written by determine the current reserves without any distortion from
Chartis internationally is short-tail, high frequency and low changes in exchange rates over time. In testing the Chartis
severity in nature. For this business, loss development operations, AIG’s actuaries segment the data by region,
methods are generally employed to test the loss reserves. country or class of business as appropriate to determine an
optimal balance between homogeneity and credibility.
Loss Adjustment Expenses
AIG determines reserves for legal defense and cost AIG generally determines reserves for adjuster loss
containment loss adjustment expenses for each class of adjustment expenses based on calendar year ratios of adjuster
business by one or more actuarial methods. The methods expenses paid to losses paid for the particular class of
generally include development methods analogous to those business. AIG generally determines reserves for other
described for loss development methods. The developments unallocated loss adjustment expenses based on the ratio of the
could be based on either the paid loss adjustment expenses or calendar year expenses paid to overall losses paid. This
the ratio of paid loss adjustment expenses to paid losses, or determination is generally done for all classes of business
both. Other methods include the utilization of expected combined, and reflects costs of home office claim overhead as
ultimate ratios of paid loss expense to paid losses, based on a percent of losses paid.
actual experience from prior accident years or from similar
classes of business.
Catastrophes
Special analyses are conducted by AIG in response to major These analyses may include a combination of approaches,
catastrophes in order to estimate AIG’s gross and net loss and including modeling estimates, ground-up claim analysis, loss
loss expense liability from those events. evaluation reports from on-site field adjusters, and market
share estimates.
AIG’s loss reserve analyses do not provide a range of loss reserve estimates. Because a large portion of the loss
reserves from Chartis business relates to longer-tail casualty classes of business driven by severity rather than
frequency of claims, such as excess casualty and D&O, AIG believes that developing a range around loss reserve
estimates would not be meaningful. Using the reserving methodologies described above, AIG’s actuaries determine
their best estimate of the required reserve and advise management of that amount. An important part of AIG’s
internal governance process over the establishment of loss reserves is the Reserve Review Committee. This multi-
disciplinary committee is comprised of senior actuarial, finance, claims, risk management and business unit
executives throughout the organization. The purpose of the Reserve Review Committee is to provide oversight,
policy establishment and guidance to the reserving process and, when deemed necessary, to adjust the liability for
unpaid claims and claim adjustment expenses to an amount that is different than the amounts recommended by
the actuaries.
AIG 2011 Form 10-K 101