AIG 2010 Annual Report Download - page 118

American International Group, Inc., and Subsidiaries
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 the latest three accident years, and are given some weight for all years other than the latest accident
year. For excess coverages, expected loss methods are generally given all the weight for the latest three accident
years, and are also given considerable weight for accident years prior to the latest three years. For other classes of
healthcare coverage, an analogous weighting between loss development and expected loss ratio methods is utilized.
The weights assigned to each method are those which are believed to result in the best combination of
responsiveness and stability. Frequency/severity methods are sometimes utilized for pricing certain healthcare
accounts or business. However, in testing loss reserves the business is generally combined into larger groupings to
enhance the credibility of the loss experience. The frequency/severity methods that are applicable in pricing may
not be appropriate for reserve testing and thus frequency/severity methods are not generally employed in AIG’s
healthcare reserve analyses.
Professional Liability: AIG generally uses a combination of loss development methods and expected loss ratio
methods for professional liability classes of business. Loss development methods are used for the more mature
accident years. Greater weight is given to expected loss ratio methods in the more recent accident years. Reserves
are tested separately for claims made classes and classes written on occurrence policy forms. Further
segmentations are made in a manner believed to provide an appropriate balance between credibility and
homogeneity of the data. Frequency/severity methods are used in pricing and profitability analyses for some classes
of professional liability; however, for loss reserve testing, the need to enhance credibility generally results in
classes that are not sufficiently homogenous to utilize frequency/severity methods.
Catastrophic Casualty: AIG utilizes expected loss ratio methods for all accident years for catastrophic casualty
business. This class of business consists of casualty or financial lines coverage which attaches in excess of very high
attachment points; thus the claims experience is marked by very low frequency and high severity. Because of the
limited number of claims, loss development methods are not utilized. The expected loss ratios and loss
development assumptions utilized are based upon the results of prior accident years for this business as well as for
similar classes of business written above lower attachment points. The business is generally written on a claims
made basis. AIG utilizes ground-up claim projections provided by AIG claims staff to assist in developing the
appropriate reserve.
102 AIG 2010 Form 10-K