AIG 2010 Annual Report Download - page 112

American International Group, Inc., and Subsidiaries
For the year-end 2010 loss reserve review, AIG’s actuaries took into account the favorable development from
prior accident years, as well as the continuing favorable development observed in the ground-up claims projections
by AIG claims staff over the past five years. This favorable development was partially offset by higher than
expected initial claim projections for accident year 2009.
For the year-end 2009 loss reserve review, AIG’s actuaries took into account the favorable development for
accident years 2007 and prior, as well as adverse development from accident year 2008. In response to the
emerging favorable development observed in the ground-up claims projections by AIG claims staff over the past
several years, AIG considered both the higher than expected initial claim projections for accident year 2008 as
well as the favorable developments for the claims projections from the earlier accident years in determining the
loss ratio for accident year 2009.
For the year-end 2008 loss reserve review, AIG’s actuaries took into account the favorable loss emergence for
accident years 2006 and prior. They determined that, in order to respond to the significant favorable loss
emergence during 2007 and 2008, greater weight should be applied to the improving loss experience for 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.
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 loss reserves by major lines of business table above.
Healthcare: Healthcare business written by Chartis U.S. produced moderate favorable development in 2010
and 2009 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. No significant changes in
assumptions were made for the year-end 2009 or 2010 loss reserve review.
Primary (Specialty) Workers’ Compensation: AIG’s Primary (Specialty) Workers’ Compensation business unit
grew significantly in the early to mid 2000’s but has reduced its premium writings by nearly 70 percent since 2007.
During 2010, losses for accident years 2007 through 2009 continued to emerge at higher levels than anticipated by
the expected loss ratios originally established for these accident years. A total of $96 million of adverse loss
development was recorded for specialty workers’ compensation in the first three quarters of 2010, consisting of
$15 million, $38 million and $43 million in the first through third quarters, respectively. Significant improvements
in claims handling, which had the effect of accelerating claims recognition (without increasing overall loss costs),
were believed to be the cause of the earlier emergence of claims during this period. However, the adverse loss
emergence during 2010, including in the fourth quarter, led AIG to conclude that the worsening experience was
attributable to a credible upward trend in the emergence of losses, rather than claims handling. Reasons for the
worsening experience include the persistently high rates of unemployment observed in 2010, which diminish the
opportunities of employers to offer ‘‘light duty’’ return-to-work mitigation, and evidence of pain management
96 AIG 2010 Form 10-K