AIG 2010 Annual Report Download - page 115

American International Group, Inc., and Subsidiaries
A comprehensive annual loss reserve review is conducted in the fourth quarter of each year for each Chartis
subsidiary. These detailed reviews are conducted 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 tested. In the course of these detailed reserve reviews an actuarial central estimate of the loss reserve is
determined. The sum of these central estimates for each class of business for each subsidiary provides an overall
actuarial central estimate of the loss reserve for that subsidiary. The ultimate process by which the actual carried
reserves are determined considers both the internal actuarial central estimate and numerous other internal and
external factors including a qualitative assessment of inflation and other economic conditions in the United States
and abroad, changes in the legal, regulatory, judicial and social environment, underlying policy pricing, terms and
conditions, and claims handling, as well as third-party actuarial reviews that are periodically performed for key
classes of business. Loss reserve development can also be affected by commutations of assumed and ceded
reinsurance agreements.
Actuarial Methods for Major Classes of Business
In testing the reserves for each class of business, a determination is made by AIG’s actuaries as to the most
appropriate actuarial methods. This determination is based on a variety of factors including the nature of the
claims associated with the class of business, such as the frequency or severity of the claims. Other factors
considered include 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. In addition to
determining the actuarial methods, the actuaries determine the appropriate loss reserve groupings of data. For
example, AIG writes a great number of unique subclasses of professional liability. For pricing or other purposes, it
is appropriate to evaluate the profitability of each subclass individually. However, for purposes of estimating the
loss reserves for professional liability, it is appropriate to combine the subclasses into larger groups. The greater
degree of credibility in the claims experience of the larger groups may outweigh the greater degree of
homogeneity of the individual subclasses. This determination of data segmentation and actuarial methods is
carefully considered for each class of business. The segmentation and actuarial methods chosen are those which
together are expected to produce the most accurate estimate of the loss reserves.
Actuarial methods used by AIG for most long-tail casualty classes of business include loss development methods
and expected loss ratio methods, including ‘‘Bornhuetter Ferguson’’ methods described below. Other methods
considered include frequency/severity methods, although these are generally used by AIG more for pricing analysis
than for loss reserve analysis. Loss development methods utilize the actual loss development patterns from prior
accident years to project the reported losses to an ultimate basis for subsequent accident years. Loss development
methods generally are most appropriate for classes of business which exhibit a stable pattern of loss development
from one accident year to the next, and for which the components of the classes have similar development
characteristics. For example, property exposures would generally not be combined into the same class as casualty
exposures, and primary casualty exposures would generally not be combined into the same class as excess casualty
exposures. Expected loss ratio methods are generally utilized by AIG where the reported loss data lacks sufficient
credibility to utilize loss development methods, such as for new classes of business or for long-tail classes at early
stages of loss development.
AIG 2010 Form 10-K 99