AIG 2008 Annual Report Download - page 98

analysis projects ultimate losses for claims within each of several categories of delinquency based on actual
historical experience and is essentially a frequency/severity analysis for each category of delinquency. Additional
reserve tests using “Bornhuetter Ferguson” methods are also employed, as well as tests measuring losses as a
percent of risk in force. Reserves are reviewed separately for each class of business to consider the loss development
characteristics associated with the claims, the volume of claim data available for the applicable class and the
applicability of various actuarial methods to the class.
Short-Tail Classes: AIG generally uses either loss development methods or IBNR factor methods to set
reserves for short-tail classes such as property coverages. Where a factor is used, it generally represents a percent of
earned premium or other exposure measure. The factor is 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 AIG’s Foreign General Insurance sub-segment includes both long-tail
and short-tail classes of business. For long-tail classes of business, the actuarial methods utilized would be
analogous to those described above. However, the majority of business written by Foreign General Insurance is
short-tail, high frequency and low severity in nature. For this business, loss development methods are generally
employed to test the loss reserves. AIG maintains a data base of detailed historical premium and loss transactions in
original currency for business written by Foreign General Insurance, thereby allowing AIG actuaries to determine
the current reserves without any distortion from changes in exchange rates over time. In testing the Foreign General
Insurance reserves, AIG’s actuaries segment the data by region, 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 containment loss adjustment
expenses for each class of business by one or more actuarial methods. The methods generally include development
methods analogous to those described for loss development methods. The developments could be based on either
the paid loss adjustment expenses or the ratio of paid loss adjustment expenses to paid losses, or both. Other
methods include the utilization of expected ultimate ratios of paid loss expense to paid losses, based on actual
experience from prior accident years or from similar classes of business. AIG generally determines reserves for
adjuster loss adjustment expenses based on calendar year ratios of adjuster expenses paid to losses paid for the
particular class of business. AIG generally determines reserves for other unallocated loss adjustment expenses
based on the ratio of the calendar year expenses paid to overall losses paid. This determination is generally done for
all classes of business combined, and reflects costs of home office claim overhead as a percent of losses paid.
Catastrophes: Special analyses are conducted by AIG in response to major catastrophes in order to estimate
AIG’s gross and net loss and loss expense liability from the events. These analyses may include a combination of
approaches, including modeling estimates, ground-up claim analysis, loss evaluation reports from on-site field
adjusters, and market share estimates.
AIG’s loss reserve analyses do not calculate a range of loss reserve estimates. Because a large portion of the
loss reserves from AIG’s General Insurance business relates to longer-tail casualty classes of business driven by
severity rather than frequency of claims, such as excess casualty and D&O, 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. AIG then adjusts its aggregate
carried reserves as necessary so that the actual carried reserves as of December 31 reflect this best estimate.
Volatility of Reserve Estimates and Sensitivity Analyses
As described above, AIG uses numerous assumptions in determining its best estimate of reserves for each class
of business. The importance of any specific assumption can vary by both class of business and accident year. If
actual experience differs from key assumptions used in establishing reserves, there is potential for significant
variation in the development of loss reserves, particularly for long-tail casualty classes of business such as excess
casualty, D&O or workers’ compensation. Set forth below is a sensitivity analysis that estimates the effect on the
loss reserve position of using alternative loss trend or loss development factor assumptions rather than those actually
used in determining AIG’s best estimates in the year-end loss reserve analyses in 2008. The analysis addresses each
major class of business for which a material deviation to AIG’s overall reserve position is believed reasonably
92 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries