AIG 2008 Annual Report Download - page 92

accident years 2006 and prior. Loss reserve selections therefore gave increased weight to the improved experience
and less weight to the ground-up claim projections for these accident years, as the experience has continued to
improve relative to the claim benchmark that was originally established for these accident years. For accident year
2007, the claim projections include claims relating to the credit crisis. The recognition of these projections resulted
in a significant increase in loss reserves for some D&O subclasses. However this was partially offset by favorable
loss development for other subclasses that were significantly less affected by the credit crisis. The overall
development for accident year 2007 was thus only a modest increase in loss reserves. The reserves established
for accident year 2008 reflect AIG’s expectation of increased claim activity relating to the credit crisis. Given the
uncertainty of the ultimate development from claims relating to the credit crisis in accident years 2007 and 2008,
there is a greater than normal potential variation in the loss ratios for these accident years. The increased
responsiveness to the improving loss trends for accident years 2006 and prior resulted in approximately $225 million
of favorable loss development in the fourth quarter of 2008 for this business, primarily in accident years 2004 and
2005.
For the year-end 2007 loss reserve review, AIG’s actuaries determined that no significant changes in the
assumptions were required. Prior accident year reserve development in 2007 was favorable by approximately
$305 million, due primarily to favorable development from accident years 2004 and 2005, and to a lesser extent
2003 and 2006. AIG’s actuaries continued to benchmark the loss reserve indications to the ground-up claim
projections provided by AIG claims staff for this class of business. For the year-end 2007 loss reserve review, the
ground-up claim projections included all accident years through 2006, and included stock options backdating-
related exposures from accident year 2006.
For the year-end 2006 loss reserve review, AIG’s actuaries determined that no significant changes in the
assumptions were required. Prior accident year loss development in 2006 was favorable by approximately
$20 million, an insignificant amount for these classes. AIG’s actuaries continued to benchmark the loss reserve
indications to the ground-up claim projections provided by AIG claims staff for this class of business. For the year-
end 2006 loss reserve review, the ground-up claim projections included all accident years through 2005.
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 table above.
Healthcare: Healthcare business written by Commercial Insurance produced moderate favorable develop-
ment in 2006 and 2007 and significant favorable development in 2008. Healthcare loss reserves have benefited from
favorable market conditions and an improved legal environment in accident years 2002 and subsequent, following a
period of adverse loss trends and market conditions that began in the mid 1990’s. For the year-end 2008 loss reserve
review, AIG’s actuaries responded to the consistently favorable experience observed during the latest three years by
utilizing more responsive assumptions relating to loss development factors, loss trend factors, and expected loss
ratios for this business. These modified assumptions resulted in approximately $140 million of additional favorable
development that was recognized in the fourth quarter of 2008 for this business.
Overview of Loss Reserving Process
The General Insurance loss reserves can generally be categorized into two distinct groups. One group is short-
tail classes of business consisting principally of property, personal lines and certain casualty classes. The other
group is long-tail casualty classes of business which includes excess and umbrella liability, D&O, professional
liability, medical malpractice, workers’ compensation, general liability, products liability and related classes.
Short-Tail Reserves
For operations writing short-tail coverages, such as property coverages, the process of recording quarterly loss
reserves is generally geared toward maintaining an appropriate reserve for the outstanding exposure, rather than
determining an expected loss ratio for current business. For example, the IBNR reserve required for a class of
property business might be expected to approximate 20 percent of the latest year’s earned premiums, and this level
of reserve would generally be maintained regardless of the loss ratio emerging in the current quarter. The 20 percent
factor would be adjusted to reflect changes in rate levels, loss reporting patterns, known exposure to unreported
losses, or other factors affecting the particular class of business.
86 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries