AIG 2009 Annual Report Download - page 99

American International Group, Inc., and Subsidiaries
two most recent accident years, whereas loss development methods are given more weight in more mature accident
years. In addition to these traditional actuarial methods, AIG’s actuaries utilize ground-up claim projections provided
by AIG claims staff as a benchmark for determining the indicated ultimate losses for all accident years other than the
most recent accident year. For the year-end 2009 loss reserve review, claims projections for accident years 2008 and
prior were utilized. These classes of business reflect claims made coverage, and losses are characterized by low
frequency and high severity. Thus, the claim projections can produce an overall indicator of the ultimate loss exposure
for these classes by identifying and estimating all large losses. Frequency/severity methods are generally not utilized
for these classes as the overall losses are driven by large losses more than by claim frequency. Severity trends have
varied significantly from accident year to accident year.
Workers’ Compensation: AIG generally utilizes loss development methods for all but the most recent accident
year. Expected loss ratio methods generally are given significant weight only in the most recent accident year.
Workers’ compensation claims are generally characterized by high frequency, low severity, and relatively consistent
loss development from one accident year to the next. AIG is a leading writer of workers’ compensation, and thus has
sufficient volume of claims experience to utilize development methods. AIG does not believe frequency/severity
methods are as appropriate, due to volume changes in AIG’s workers’ compensation business over the years. AIG
generally segregates California business from other business in evaluating workers’ compensation reserves. Certain
classes of workers’ compensation, such as construction, are also evaluated separately. Additionally, AIG writes a
number of very large accounts which include workers’ compensation coverage. These accounts are generally priced by
AIG actuaries, and to the extent appropriate, the indicated losses based on the pricing analysis may be utilized to
record the initial estimated loss reserves for these accounts.
Excess Workers’ Compensation: AIG generally utilizes a combination of loss development methods and expected
loss ratio methods. Loss development methods are given the greater weight for mature accident years such as 2002
and prior. Expected loss ratio methods are given the greater weight for the more recent accident years. Excess
workers’ compensation is an extremely long-tail class of business, with loss emergence extending for decades.
Therefore there is limited credibility in the reported losses for many of the more recent accident years. For the mature
accident years, AIG’s actuaries utilize claims projections provided by AIG claims staff to help determine the loss
development factors for this class of business.
General Liability: AIG generally uses a combination of loss development methods and expected loss ratio
methods for primary general liability or products liability classes. For certain classes of business with sufficient loss
volume, loss development methods may be given significant weight for all but the most recent one or two accident
years, whereas for smaller or more volatile classes of business, loss development methods may be given limited weight
for the five or more most recent accident years. Expected loss ratio methods would be utilized for the more recent
accident years for these classes. The loss experience for primary general liability business is generally reviewed at a
level that is believed to provide the most appropriate data for reserve analysis. For example, primary claims made
business is generally segregated from business written on an occurrence policy form. Additionally, certain subclasses,
such as construction, are generally reviewed separately from business in other subclasses. Due to the fairly long-tail
nature of general liability business, and the many subclasses that are reviewed individually, there is less credibility in
the reported losses and increased reliance on expected loss ratio methods. AIG’s actuaries generally do not utilize
frequency/severity methods to test reserves for this business, due to significant changes and growth in AIG’s general
liability and products liability business over the years.
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
91 AIG 2009 Form 10-K