AIG 2006 Annual Report Download - page 95

American International Group, Inc. and Subsidiaries
business, due to significant changes and growth in AIG’s general accident year. Frequency/severity methods are not employed due
liability and products liability business over the years. to the high severity nature of the claims and different mix of
claims from year to year.
Commercial Automobile Liability: AIG generally utilizes loss devel-
opment methods for all but the most recent accident year for Personal Auto (Domestic): AIG generally utilizes frequency/severity
commercial automobile classes of business. Expected loss ratio methods and loss development methods for domestic personal
methods are generally given significant weight only in the most auto classes. For many classes of business, greater reliance is
recent accident year. Frequency/severity methods are generally placed on frequency/severity methods as claim counts emerge
not utilized due to significant changes and growth in this business quickly for personal auto and allow for more immediate analysis of
over the years. resulting loss trends and comparisons to industry and other
diagnostic metrics.
Healthcare: AIG generally uses a combination of loss development
methods and expected loss ratio methods for healthcare classes Fidelity/Surety: AIG generally uses loss development methods for
of business. The largest component of the healthcare business fidelity exposures for all but the latest accident year. Expected
consists of coverage written for hospitals and other healthcare loss ratio methods are also given weight for the more recent
facilities. Reserves for excess coverage are tested separately accident years, and for the latest accident year they may be given
from those for primary coverage. For primary coverages, loss 100 percent weight. For surety exposures, AIG generally uses the
development methods are generally given the majority of the same method as for short-tail classes.
weight for all but the latest three accident years, and are given Mortgage Guaranty: AIG tests mortgage guaranty reserves using
some weight for all years other than the latest accident year. For loss development methods, supplemented by an internal claim
excess coverages, expected loss methods are generally given all analysis by actuaries and staff who specialize in the mortgage
the weight for the latest three accident years, and are also given guaranty business. The claim analysis projects ultimate losses for
considerable weight for accident years prior to the latest three claims within each of several categories of default based on
years. For other classes of healthcare coverage, an analogous actual historical experience and is essentially a frequency/severity
weighting between loss development and expected loss ratio analysis for each category of default.
methods is utilized. The weights assigned to each method are
those which are believed to result in the best combination of Short-Tail Classes: AIG generally uses either loss development
responsiveness and stability. Frequency/severity methods are methods or IBNR factor methods to set reserves for short-tail
sometimes utilized for pricing certain healthcare accounts or classes such as property coverages. Where a factor is used, it
business. However, in testing loss reserves the business is generally represents a percent of earned premium or other
generally combined into larger groupings to enhance the credibility exposure measure. The factor is determined based on prior
of the loss experience. The frequency/severity methods that are accident year experience. For example, the IBNR for a class of
applicable in pricing may not be appropriate for reserve testing property coverage might be expected to approximate 20 percent
and thus frequency/severity methods are not generally employed of the latest year’s earned premium. The factor is continually
in AIG’s healthcare reserve analyses. reevaluated in light of emerging claim experience as well as rate
changes or other factors that could affect the adequacy of the
Professional Liability: AIG generally uses a combination of loss IBNR factor being employed.
development methods and expected loss ratio methods for
professional liability classes of business. Loss development International: Business written by AIG’s Foreign General Insurance
methods are used for the more mature accident years. Greater sub-segment includes both long-tail and short-tail classes of
weight is given to expected loss ratio methods in the more recent business. For long-tail classes of business, the actuarial methods
accident years. Reserves are tested separately for claims made utilized would be analogous to those described above. However,
classes and classes written on occurrence policy forms. Further the majority of business written by Foreign General Insurance is
segmentations are made in a manner believed to provide the short-tail, high frequency and low severity in nature. For this
most appropriate balance between credibility and homogeneity of business, loss development methods are generally employed to
the data. Frequency/severity methods are used in pricing and test the loss reserves. AIG maintains a data base of detailed
profitability analyses for some classes of professional liability; historical premium and loss transactions in original currency for
however, for loss reserve testing, the need to enhance credibility business written by Foreign General Insurance, thereby allowing
generally results in classes that are not sufficiently homogenous AIG actuaries to determine the current reserves without any
to utilize frequency/severity methods. distortion from changes in exchange rates over time. In testing
the Foreign General Insurance reserves, AIG’s actuaries segment
Aviation: AIG generally uses a combination of loss development the data by region, country or class of business as appropriate to
methods and expected loss ratio methods for aviation exposures. determine the optimal balance between homogeneity and
Aviation claims are not very long-tail in nature; however, they are credibility.
driven by claim severity. Thus a combination of both development
and expected loss ratio methods are used for all but the latest Loss Adjustment Expenses: AIG determines reserves for legal
accident year to determine the loss reserves. Expected loss ratio defense and cost containment loss adjustment expenses for each
methods are used to determine the loss reserves for the latest class of business by one or more actuarial methods. The methods
Form 10-K 2006 AIG 45