2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
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American International Group, Inc. and Subsidiaries<br />
Management’s Discussion and Analysis of<br />
Financial Condition and Results of Operations Continued<br />
in 2006, and believes that its reserves as of December 31, <strong>2007</strong> required. Prior accident year development in <strong>2007</strong> was favorable<br />
are adequate for its D&O and related management liability classes by approximately $15 million, an insignificant amount for this<br />
of business.<br />
class.<br />
Loss reserves pertaining to D&O and related management<br />
liability classes of business are included in the other liability Overview of Loss Reserving Process<br />
claims made line of business, as presented in the table above.<br />
The General Insurance loss reserves can generally be categorized<br />
Excess Workers Compensation: This class of business exper- into two distinct groups. One group is short-tail classes of<br />
ienced significant adverse development in 2005, a relatively minor business consisting principally of property, personal lines and<br />
amount of adverse development in 2006, and a minor amount of certain casualty classes. The other group is long-tail casualty<br />
favorable development in <strong>2007</strong>. The adverse development in classes of business which includes excess and umbrella liability,<br />
2005 related to 2002 and prior accident years. This adverse D&O, professional liability, medical malpractice, workers <strong>com</strong>pendevelopment<br />
resulted primarily from significant loss cost in-<br />
sation, general liability, products liability, and related classes.<br />
creases, primarily attributable to rapidly increasing medical inflation<br />
and advances in medical care, which increased the cost of Short-Tail Reserves<br />
covered medical care and extended the life span of severely<br />
For operations writing short-tail coverages, such as property<br />
injured workers. The effect of these factors on excess workers<br />
coverages, the process of recording quarterly loss reserves is<br />
<strong>com</strong>pensation claims experience is leveraged, as frequency is<br />
generally geared toward maintaining an appropriate reserve for the<br />
increased by the rising number of claims that reach the excess<br />
outstanding exposure, rather than determining an expected loss<br />
layers.<br />
ratio for current business. For example, the IBNR reserve required<br />
In response to the significantly adverse loss development in<br />
for a class of property business might be expected to approximate<br />
2005, an additional study was conducted for the 2005 year-end<br />
20 percent of the latest year’s earned premiums, and this level of<br />
actuarial reserve analysis for DBG pertaining to the selection of<br />
reserve would generally be maintained regardless of the loss ratio<br />
loss development factors for this class of business. Claims for<br />
emerging in the current quarter. The 20 percent factor would be<br />
excess workers <strong>com</strong>pensation exhibit an exceptionally long-tail of<br />
adjusted to reflect changes in rate levels, loss reporting patterns,<br />
loss development, running for decades from the date the loss is<br />
known exposure to unreported losses, or other factors affecting<br />
incurred. Thus, the adequacy of loss reserves for this class is<br />
the particular class of business.<br />
sensitive to the estimated loss development factors, as such<br />
factors may be applied to many years of loss experience. In order<br />
to better estimate the tail development for this class, <strong>AIG</strong> claims<br />
Long-Tail Reserves<br />
staff conducted a claim-by-claim projection of the expected<br />
Estimation of ultimate net losses and loss expenses (net losses)<br />
ultimate paid loss for each open claim for 1998 and prior<br />
for long-tail casualty classes of business is a <strong>com</strong>plex process<br />
accident years as these are the primary years from which the tail and depends on a number of factors, including the class and<br />
factors are derived. The objective of the study was to provide a volume of business involved. Experience in the more recent<br />
benchmark against which loss development factors in the tail accident years of long-tail casualty classes of business shows<br />
could be evaluated. The resulting loss development factors utilized limited statistical credibility in reported net losses because a<br />
by the actuaries in the year-end 2005 study reflected an increase relatively low proportion of net losses would be reported claims<br />
of approximately 18 percent from the factors used in the prior and expenses and an even smaller percentage would be net<br />
year study without the benefit of the claims benchmark. In<br />
losses paid. Therefore, IBNR would constitute a relatively high<br />
addition, the loss cost trend assumption for excess workers proportion of net losses.<br />
<strong>com</strong>pensation was increased from approximately 2.5 percent to <strong>AIG</strong>’s carried net long-tail loss reserves are tested using loss<br />
6 percent for the 2005 study. trend factors that <strong>AIG</strong> considers appropriate for each class of<br />
For the year-end 2006 loss reserve review, <strong>AIG</strong> claims staff business. A variety of actuarial methods and assumptions is<br />
updated the claim-by-claim projection for each open claim for normally employed to estimate net losses for long-tail casualty<br />
accident years 1999 and prior. These updated claims projections classes of businesses. These methods ordinarily involve the use<br />
were utilized by the actuaries as a benchmark for loss develop- of loss trend factors intended to reflect the annual growth in loss<br />
ment factors in the year-end 2006 study. <strong>AIG</strong>’s actuaries<br />
costs from one accident year to the next. For the majority of longdetermined<br />
that no significant changes in the assumptions were tail casualty classes of business, net loss trend factors approxirequired.<br />
Prior accident year development in 2006 was adverse by mated five percent. Loss trend factors reflect many items<br />
approximately $70 million, a relatively minor amount for this including changes in claims handling, exposure and policy forms,<br />
class.<br />
current and future estimates of monetary inflation and social<br />
For the year-end <strong>2007</strong> loss reserve review, <strong>AIG</strong> claims staff inflation and increases in litigation and awards. These factors are<br />
again updated the claim-by-claim projection for each open claim periodically reviewed and adjusted, as appropriate, to reflect<br />
for accident years 2000 and prior. These updated claims<br />
emerging trends which are based upon past loss experience.<br />
projections were utilized by the actuaries as a benchmark for loss Thus, many factors are implicitly considered in estimating the year<br />
development factors in the year-end <strong>2007</strong> study. <strong>AIG</strong>’s actuaries to year growth in loss costs.<br />
determined that no significant changes in the assumptions were<br />
52 <strong>AIG</strong> <strong>2007</strong> Form 10-K