AIG 2010 Annual Report Download - page 119

American International Group, Inc., and Subsidiaries
Aviation: AIG generally uses a combination of loss development methods and expected loss ratio methods for
aviation exposures. Aviation claims are not very long-tail in nature; however, they are driven by claim severity.
Thus a combination of both development and expected loss ratio methods are used for all but the latest accident
year to determine the loss reserves. Expected loss ratio methods are used to determine the loss reserves for the
latest accident year. Frequency/severity methods are not employed due to the high severity nature of the claims
and different mix of claims from year to year.
Personal Auto (Domestic): AIG generally utilizes frequency/severity methods and loss development methods
for domestic personal auto classes. For many classes of business, greater reliance is placed on frequency/severity
methods as claim counts emerge quickly for personal auto and allow for more immediate analysis of resulting loss
trends and comparisons to industry and other diagnostic metrics.
Fidelity/Surety: AIG generally uses loss development methods for fidelity exposures for all but the latest
accident year. Expected loss ratio methods are also given weight for the more recent accident years, and for the
latest accident year they may be given 100 percent weight. For surety exposures, AIG generally uses the same
method as for short-tail classes.
Mortgage Guaranty: AIG tests mortgage guaranty reserves using loss development methods, supplemented by
an internal claim analysis by actuaries and staff who specialize in the mortgage guaranty business. The claim
analysis projects ultimate losses for claims within each of several categories of delinquency based on actual
historical experience and is essentially a frequency/severity analysis for each category of delinquency. Additional
reserve tests are also employed, such as tests measuring losses as a percent of risk in force. Reserves are reviewed
separately for each class of business to consider 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.
Estimates for mortgage guaranty insurance losses and loss adjustment expense reserves are based on notices of
mortgage loan delinquencies and estimates of delinquencies that have been incurred but have not been reported
by loan servicers, based upon historical reporting trends. Mortgage Guaranty establishes reserves using a
percentage of the contractual liability (for each delinquent loan reported) that is based upon past experience
regarding certain loan factors such as age of the delinquency, cure rates, dollar amount of the loan and type of
mortgage loan. Mortgage Guaranty losses and loss adjustment expenses have been adversely affected by
macroeconomic events, such as declining home prices and increasing unemployment, among other events, related
to the turmoil in the financial markets. As these macroeconomic events change, adversely or favorably, the
determination of the ultimate losses and loss adjustment expenses requires a high degree of judgment. Responding
to these adverse macroeconomic influences, numerous government and lender loan modification programs have
been implemented to mitigate mortgage losses. The loan modification programs have produced additional cures of
delinquent loans in 2010 that may not continue in 2011 as some modification programs are phased out or retired.
In addition, these loan modifications may re-default resulting in new losses for Mortgage Guaranty.
Increased occurrences of fraudulent loans, underwriting violations, and other deviations from contractual terms
mostly related to the 2006 and 2007 blocks of business have resulted in an increase in claim rescissions and denials
(collectively referred to as rescissions) during 2010. As a result, in the latter half of 2010 many lenders increased
their rescission appeals activity as well as the success rate on those appeals by focusing additional resources on the
process. The increased lender attention on tracking down missing loan documents along with the heightened focus
on appeals of rescissions caused the estimated ultimate rescission rate net of appeals in the loss reserves to be
lower than the rescission level experienced in the first half of 2010. AIG believes it has provided appropriate
reserves for currently delinquent loans, consistent with industry practices.
Short-Tail Classes: AIG generally uses either loss development methods or IBNR factor methods to set
reserves for short-tail classes such as property coverages. Where a factor is used, it generally represents a percent
of earned premium or other exposure measure. The factor is determined based on prior accident year experience.
For example, the IBNR for a class of property coverage might be expected to approximate 20 percent of the latest
AIG 2010 Form 10-K 103