AIG 2009 Annual Report Download - page 96

American International Group, Inc., and Subsidiaries
business, net loss trend factors approximated five percent. Loss trend factors reflect many items including changes in
claims handling, exposure and policy forms, current and future estimates of monetary inflation and social inflation and
increases in litigation and awards. These factors are periodically reviewed and adjusted, as appropriate, to reflect
emerging trends which are based upon past loss experience. Thus, many factors are implicitly considered in estimating
the year to year growth in loss costs.
A number of actuarial assumptions are generally made in the review of reserves for each class of business. For
longer-tail classes of business, actuarial assumptions generally are made with respect to the following:
• Loss trend factors which are used to establish expected loss ratios for subsequent accident years based on the
projected loss ratios for prior accident years.
• Expected loss ratios for the latest accident year (i.e., accident year 2009 for the year-end 2009 loss reserve
analysis) and, in some cases for accident years prior to the latest accident year. The expected loss ratio generally
reflects the projected loss ratio from prior accident years, adjusted for the loss trend (see above) and the effect
of rate changes and other quantifiable factors on the loss ratio. For low-frequency, high-severity classes such as
excess casualty, expected loss ratios generally are used for at least the three most recent accident years.
• Loss development factors which are used to project the reported losses for each accident year to an ultimate
basis. Generally, the actual loss development factors observed from prior accident years would be used as a basis
to determine the loss development factors for the subsequent accident years.
AIG records quarterly changes in loss reserves for each of its many General Insurance classes of business. The
overall change in AIG’s loss reserves is based on the sum of these classes of business changes. For most long-tail
classes of business, the process of recording quarterly loss reserve changes involves determining the estimated current
loss ratio for each class of coverage. This loss ratio is multiplied by the current quarter’s net earned premium for that
class of coverage to determine the current accident quarter’s total estimated net incurred loss and loss expense. The
change in loss reserves for the quarter for each class is thus the difference between the net incurred loss and loss
expense, estimated as described above, and the net paid losses and loss expenses in the quarter. Also, any change in
estimated ultimate losses from prior accident years, either positive or negative, is reflected in the loss reserve for the
current quarter.
Details of the Loss Reserving Process
The process of determining the current loss ratio for each class of business is based on a variety of factors. These
include, but are not limited to, the following considerations: prior accident year and policy year loss ratios; rate
changes; changes in coverage, reinsurance, or mix of business; and actual and anticipated changes in external factors
affecting results, such as trends in loss costs or in the legal and claims environment. The current loss ratio for each
class of business reflects input from actuarial, underwriting and claims staff and is intended to represent
management’s best estimate of the current loss ratio after reflecting all of the factors described above. At the close of
each quarter, the assumptions underlying the loss ratios are reviewed to determine if the loss ratios remain
appropriate. This process includes a review of the actual claims experience in the quarter, actual rate changes
achieved, actual changes in coverage, reinsurance or mix of business, and changes in certain other factors that may
affect the loss ratio. When this review suggests that the initially determined loss ratio is no longer appropriate, the loss
ratio for current business is changed to reflect the revised assumptions.
A comprehensive annual loss reserve review is completed in the fourth quarter of each year for each AIG General
Insurance subsidiary. These reviews are conducted in full detail for each class of business for each subsidiary, and thus
consist of hundreds of individual analyses. The purpose of these reviews is to confirm the appropriateness of the
reserves carried by each of the individual subsidiaries, and therefore of AIG’s overall carried reserves. The reserve
analysis for each class of business is performed by the actuarial personnel who are most familiar with that class of
business. In completing these detailed actuarial reserve analyses, the actuaries are required to make numerous
assumptions, including the selection of loss development factors and loss cost trend factors. They are also required to
determine and select the most appropriate actuarial methods to employ for each business class. Additionally, they
must determine the appropriate segmentation of data from which the adequacy of the reserves can be most accurately
AIG 2009 Form 10-K 88