AIG 2010 Annual Report Download - page 117

American International Group, Inc., and Subsidiaries
business such as personal auto. AIG also utilizes these methods in pricing subclasses of professional liability.
However, AIG does not generally utilize frequency/severity methods to test loss reserves, due to the general
nature of AIG’s reserves being applicable to lower frequency, higher severity commercial classes of business where
average claim severity is volatile.
Excess Casualty: AIG generally uses a combination of loss development methods and expected loss ratio
methods for excess casualty classes. Expected loss ratio methods are generally utilized for at least the three latest
accident years, due to the relatively low credibility of the reported losses. The loss experience is generally reviewed
separately for lead umbrella classes and for other excess classes, due to the relatively shorter tail for lead umbrella
business. Automobile-related claims are generally reviewed separately from non-auto claims, due to the shorter-tail
nature of the automobile-related claims. Claims relating to certain latent exposures such as construction defects or
exhaustion of underlying product aggregate limits are reviewed separately due to the unique emergence patterns
of losses relating to these claims. The expected loss ratios utilized for recent accident years are based on the
projected ultimate loss ratios of prior years, adjusted for rate changes, estimated loss cost trends and all other
changes that can be quantified. The estimated loss cost trend utilized in the year-end 2010 reviews averaged
approximately five percent for excess casualty classes. Frequency/severity methods are generally not utilized as the
vast majority of reported claims do not result in a claim payment. In addition, the average severity varies
significantly from accident year to accident year due to large losses which characterize this class of business, as
well as changing proportions of claims which do not result in a claim payment.
D&O: AIG generally utilizes a combination of loss development methods and expected loss ratio methods for
D&O and related management liability classes of business. Expected loss ratio methods are given more weight in
the 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 2010 loss reserve review, claims
projections for accident years 2009 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 2003 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.
AIG 2010 Form 10-K 101