AIG 2014 Annual Report Download - page 207

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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Class of Business or Category and Actuarial Method Application of Actuarial Method
Healthcare
We generally use a combination of loss development
methods and expected loss ratio methods for
healthcare classes of business.
Frequency/severity methods are sometimes used for
pricing certain healthcare accounts or business.
However, for loss reserve adequacy testing, the need
to ensure sufficient credibility generally results in
segmentations that are not sufficiently homogenous to
utilize frequency/severity methods.
We also supplement the standard actuarial techniques
by using evaluations of the ultimate losses on unusual
claims by specialists on those classes of claims.
The largest component of the healthcare business
consists of coverage written for hospitals and other
healthcare facilities. We test reserves for excess
coverage 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 used. The weights assigned to
each method are those that are believed to result in
the best combination of responsiveness and credibility.
Professional Liability
We generally use a combination of loss development
methods and expected loss ratio methods for
professional liability classes of business.
Frequency/severity methods are used in pricing and
profitability analyses for some classes of professional
liability; however, for loss reserve adequacy testing,
the need to ensure sufficient credibility generally
results in segmentations that are not sufficiently
homogenous to utilize frequency/severity methods.
We also use claim department projections of the
ultimate value of each reported claim to supplement
and inform the standard actuarial approaches.
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.
Catastrophic Casualty
We use expected loss ratio methods for all accident
years for catastrophic casualty business. This class of
business consists of casualty or financial lines
coverage that attach 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
relied upon.
The expected loss ratios and loss development
assumptions used 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 can be written on a claims-made
or occurrence basis. We use ground-up claim
projections provided by our claims staff to assist in
developing the appropriate reserve.