AIG 2011 Annual Report Download - page 28

Additionally, following the classification of AGF as a discontinued operation in the third quarter of 2010, AIG’s
remaining consumer finance business, which is primarily conducted through the AIG Federal Savings Bank and
the Consumer Finance Group in Poland, is now reported in AIG’s Other operations category as part of
Corporate & Other.
See Note 4 to the Consolidated Financial Statements for additional information on discontinued operations.
Background
Insurance companies are required to establish a liability for the ultimate costs, including loss adjustment
expenses, of claims that have been reported but not settled and estimates of claims that have been incurred but
not reported (IBNR). Insurance companies are also required to recognize as assets the portion of such liability
that will be recovered from reinsurers. Reserves are discounted for future expected investment income, where
permitted, as disclosed in Note 13 to the Consolidated Financial Statements.
Because reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable in
the insurance industry. These changes in estimates are sometimes referred to as ‘‘loss development’’ or ‘‘reserve
development’’.
Management reviews the adequacy of the established net liability for unpaid claims and claims adjustment
expense (net loss reserves) utilizing a number of analytical reserve development techniques. Through the use of
these techniques, management monitors the adequacy of AIG’s established reserves and determines appropriate
assumptions for inflation and other factors influencing loss costs. Also, analysis of emerging specific development
patterns, such as case reserve redundancies or deficiencies and IBNR emergence, or analysis of specific structural
drivers of losses such as the historical versus expected future levels of medical cost trends, unemployment levels
and other macroeconomics indicators, as well as the legislative framework and social attitudes that affected the
propensity to file claims or the magnitude of court awards, allows management to determine any required
adjustments. A significant portion of Chartis’ business is in the commercial casualty class, which tends to involve
longer periods of time for the reporting and settlement of claims and may increase the risk and uncertainty with
respect to Chartis’ loss reserve development.
Analysis of Consolidated Loss Reserve Development
To understand the changes in estimates, it is useful to put them in the context of cumulative reserve
development experienced by AIG over a longer time frame. The first table that follows presents the development
of net loss reserves for calendar years 2001 through 2011. The net liability for unpaid claims and claims
adjustment expenses (Net Reserves Held) at the balance sheet date is shown on the first row of the table, net of
discount. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in
all years prior to the balance sheet date that were unpaid as of that balance sheet date, including estimates for
incurred but not reported claims. The amount of loss reserve discount included in the net reserves at each date is
shown immediately below the net reserves held. The undiscounted reserve at each date is equal to the sum of the
discount and the net reserves held.
The upper portion of the table presents the re-estimation over the years of the original undiscounted reserves.
This re-estimation takes into consideration a number of factors, including changes in the estimated frequency of
reported claims, effects of significant judgments, the emergence of latent exposures, and changes in medical cost
trends. For example, in the first table, the original undiscounted reserve of $27.4 billion at December 31, 2001 was
re-estimated to $55.4 billion at December 31, 2011. The amount of the development related to losses settled or
re-estimated in 2011, but incurred in 2008, is included in the cumulative development amount for years 2008,
2009, and 2010. Any increase or decrease in the estimate is reflected in operating results in the period in which
the estimate is changed.
14 AIG 2011 Form 10-K
INSURANCE ACTIVITIES
LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE