AIG 2008 Annual Report Download - page 97

Commercial Automobile Liability: AIG generally utilizes loss development methods for all but the most
recent accident year for commercial automobile classes of business. Expected loss ratio methods are generally
given significant weight only in the most recent accident year. Frequency/severity methods are generally not
utilized due to significant changes and growth in this business over the years.
Healthcare: AIG generally uses a combination of loss development methods and expected loss ratio methods
for healthcare classes of business. The largest component of the healthcare business consists of coverage written for
hospitals and other healthcare facilities. Reserves for excess coverage are tested separately from those for primary
coverage. For primary coverages, loss development methods are generally given the majority of the weight for all
but the latest three accident years, and are given some weight for all years other than the latest accident year. For
excess coverages, expected loss methods are generally given all the weight for the latest three accident years, and
are also given considerable weight for accident years prior to the latest three years. For other classes of healthcare
coverage, an analogous weighting between loss development and expected loss ratio methods is utilized. The
weights assigned to each method are those which are believed to result in the best combination of responsiveness
and stability. Frequency/severity methods are sometimes utilized for pricing certain healthcare accounts or
business. However, in testing loss reserves the business is generally combined into larger groupings to enhance
the credibility of the loss experience. The frequency/severity methods that are applicable in pricing may not be
appropriate for reserve testing and thus frequency/severity methods are not generally employed in AIG’s healthcare
reserve analyses.
Professional Liability: AIG generally uses a combination of loss development methods and expected loss
ratio methods for professional liability classes of business. Loss development methods are used for the more mature
accident years. Greater weight is given to expected loss ratio methods in the more recent accident years. Reserves
are tested separately for claims made classes and classes written on occurrence policy forms. Further segmentations
are made in a manner believed to provide an appropriate balance between credibility and homogeneity of the data.
Frequency/severity methods are used in pricing and profitability analyses for some classes of professional liability;
however, for loss reserve testing, the need to enhance credibility generally results in classes that are not sufficiently
homogenous to utilize frequency/severity methods.
Catastrophic Casualty: AIG utilizes expected loss ratio methods for all accident years for catastrophic
casualty business. This class of business consists of casualty or financial lines coverage which attaches in excess of
very high attachment points; thus the claims experience is marked by very low frequency and high severity. Because
of the limited number of claims, loss development methods are not utilized. The expected loss ratios and loss
development assumptions utilized are based upon the results of prior accident years for this business as well as for
similar classes of business written above lower attachment points. The business is generally written on a claims
made basis. AIG utilizes ground-up claim projections provided by AIG claims staff to assist in developing the
appropriate reserve.
Aviation: AIG generally uses a combination of loss development methods and expected loss ratio methods
for aviation exposures. Aviation claims are not very long-tail in nature; however, they are driven by claim severity.
Thus a combination of both development and expected loss ratio methods are used for all but the latest accident year
to determine the loss reserves. Expected loss ratio methods are used to determine the loss reserves for the latest
accident year. Frequency/severity methods are not employed due to the high severity nature of the claims and
different mix of claims from year to year.
Personal Auto (Domestic): AIG generally utilizes frequency/severity methods and loss development meth-
ods for domestic personal auto classes. For many classes of business, greater reliance is placed on frequency/
severity methods as claim counts emerge quickly for personal auto and allow for more immediate analysis of
resulting loss trends and comparisons to industry and other diagnostic metrics.
Fidelity/Surety: AIG generally uses loss development methods for fidelity exposures for all but the latest
accident year. Expected loss ratio methods are also given weight for the more recent accident years, and for the
latest accident year they may be given 100 percent weight. For surety exposures, AIG generally uses the same
method as for short-tail classes.
Mortgage Guaranty: AIG tests mortgage guaranty reserves using loss development methods, supplemented
by an internal claim analysis by actuaries and staff who specialize in the mortgage guaranty business. The claim
AIG 2008 Form 10-K 91
American International Group, Inc., and Subsidiaries