AIG 2005 Annual Report Download - page 88

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
The table below presents the reconciliation of net loss accident years. This adverse development resulted from significant
reserves for 2005, 2004 and 2003 as follows: loss cost escalation due to a variety of factors, including the
following: the increase in frequency and severity of corporate
(in millions) 2005 2004 2003 bankruptcies; the increase in frequency of financial statement
Net reserve for losses restatements; the sharp rise in market capitalization of publicly
and loss expenses at traded companies and the increase in the number of initial public
beginning of year $47,254 $36,228 $29,347 offerings, which led to an unprecedented number of IPO
Foreign exchange effect (628) 524 580 allocation/laddering suits in 2001. In addition, the extensive
Acquisition –– 391(a) utilization of multi-year policies during this period limited AIG’s
ability to respond to emerging trends as rapidly as would otherwise
Losses and loss
be the case.
expenses incurred:
AIG has experienced significant adverse loss development
Current year 28,426 26,793 20,509
since 2002 as a result of these issues. AIG has taken numerous
Prior years(b) 4,665(c) 3,564(d) 2,363
actions in response to this development, including rate increases
Losses and loss and policy form and coverage changes to better contain future loss
expenses incurred 33,091 30,357 22,872 costs in this class of business. AIG’s 2005 year-end actuarial
Losses and loss reserve analyses for DBG exposures reflected several other note-
expenses paid: worthy additional considerations and studies. AIG’s claims staff
Current year 7,331 7,692 6,187 conducted a series of ground-up claim projections covering all
Prior years 14,910 12,163 10,775 open claims for this class of business through accident year 2004.
Given the adverse development observed for this class of business
Losses and loss
in recent years, for year-end 2005 AIG believed its reserves for
expenses paid 22,241 19,855 16,962
this class were better estimated by benchmarking the actuarial
Net reserve for losses indications to these claim projections.
and loss expenses at
Excess Casualty: The adverse development for prior years was
end of year $57,476 $47,254 $36,228
approximately $1.3 billion related to 2001 and prior accident
(a) Reflects the opening balances with respect to the GE U.S.-based auto and years. This adverse development resulted from significant loss cost
home insurance business acquired in 2003. increases due to both frequency and severity of claims. The
(b) Includes accretion of discount of $(15) million in 2005, including an primary drivers of the increasing loss costs were medical inflation,
increase of $375 million in the discount recorded in 2005; $377 million in which increased the economic loss component of tort claims;
2004 and $296 million in 2003. Additionally, includes $269 million in advances in medical care, which extended the life span of severely
2005, $317 million in 2004 and $323 million in 2003 for the general
injured workers; and larger jury verdicts, which increased the value
reinsurance operations of Transatlantic, and $197 million of additional
of severe tort claims. An additional factor affecting AIG’s excess
losses incurred in 2005 resulting from increased labor and material costs
related to the 2004 Florida hurricanes. casualty experience in recent years has been the accelerated
exhaustion of underlying primary policies for homebuilders. This
(c) Includes fourth quarter charge of $1.8 billion.
has led to increasing construction defect related claim activity on
(d) Includes fourth quarter charge of $850 million attributable to the change in AIG’s excess policies. As noted above for D&O, many excess
estimate for asbestos and environmental exposures.
casualty policies were written on a multi-year basis in the late
For 2005, AIG’s overall net loss reserve development from 1990s, which limited AIG’s ability to respond to emerging trends
prior accident years was an increase of approximately $4.67 billion, as rapidly as would otherwise be the case. AIG responded to these
including approximately $269 million from the general reinsurance emerging trends by increasing rates and effecting numerous policy
operations of Transatlantic. This $4.67 billion adverse develop- form and coverage changes. This led to a significant improvement
ment in 2005 was comprised of approximately $8.60 billion for in experience beginning with accident year 2001. In response to
2002 and prior accident years, partially offset by favorable the continuing loss development, AIG increased further the loss
development for accident years 2003 and 2004 for most lines of development factors for this class of business in its 2005 year-end
business, with the notable exception being D&O. The adverse loss actuarial reserve analysis. In addition, to more accurately estimate
development for 2002 and prior accident years is attributable to losses for construction defects, a separate review was performed by
approximately $4.0 billion of development from D&O and related AIG claims staff for accounts with significant exposure to these
management liability classes of business, excess casualty, and claims.
excess workers compensation, and to approximately $873 million Excess Workers Compensation: The adverse development for prior
of development from asbestos and environmental claims. The years was approximately $1 billion related to 2002 and prior
remaining portion of the adverse development for 2002 and prior accident years. This adverse development resulted from significant
accident years includes approximately $520 million related to loss cost increases, primarily attributable to rapidly increasing
Transatlantic with the balance spread across many other lines of medical inflation and advances in medical care, which increased
business. the cost of covered medical care and extended the life span of
The largest contributors to the $4.67 billion net adverse loss severely injured workers. The effect of these factors on excess
development were: workers compensation claims experience is leveraged, as frequency
D&O and related management liability classes of business: The is increased by the rising number of claims that reach the excess
adverse development for 2002 and prior accident years totalled layers.
approximately $1.7 billion, principally related to 2002 and prior
36 AIG m Form 10-K