AIG 2005 Annual Report Download - page 93

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
for all policyholders in the aggregate provided a sufficient projects forward to the year 2025 the expected future report
sample of the policyholders can be modeled in this manner. year losses, based on AIG’s estimate of reasonable loss trend
In order to ensure its ground-up analysis was as comprehen- assumptions. These calculations are performed on losses gross
sive as possible, AIG staff produced the information required at of reinsurance. The IBNR (including a provision for develop-
policy and claim level detail for nearly 1,000 asbestos ment of reported claims) on a net basis is based on applying a
defendants and over 1,100 environmental defendants. This factor reflecting the expected ratio of net losses to gross losses
represented nearly 90 percent of all accounts for which AIG for future loss emergence.
had received any claim notice of any amount pertaining to For environmental claims, an analogous series of frequency/
asbestos or environmental exposure. AIG did not set any severity tests are produced. Environmental claims from future
minimum thresholds such as amount of case reserve outstand- report years, (i.e., IBNR) are projected out ten years, i.e.,
ing, or paid losses to date, that would have served to reduce through the year 2015.
the sample size and hence the comprehensiveness of the At year-end 2005, AIG considered a number of factors and
ground-up analysis. The results of the ground-up analysis for recent experience, in addition to the results of the respective
each significant account were examined by AIG’s claims staff top-down and ground-up analyses performed for asbestos and
for reasonableness, for consistency with policy coverage terms, environmental reserves. Among the factors considered by AIG
and any claim settlement terms applicable. Adjustments were was the continued deterioration in its asbestos report year
incorporated accordingly. The results from the universe of experience. The indication from the third scenario as described
modeled accounts, which as noted above reflects the vast above for asbestos was approximately $265 million greater than
majority of AIG’s known exposures, were then utilized to AIG’s carried net asbestos reserve, prior to its increase in the
estimate the ultimate losses from accounts that could not be fourth quarter of 2005. This marks a continuation of the trend
modeled and to determine the appropriate provision for all of adverse report year development for asbestos that has been
unreported claims. observed for the past several years. AIG also noted its asbestos
AIG conducted a comprehensive analysis of reinsurance paid losses in 2005 increased from 2004’s levels. AIG
recoverability to establish the appropriate asbestos and environ- considered the significant uncertainty that remains as to AIG’s
mental reserve net of reinsurance. AIG determined the amount ultimate liability relating to asbestos and environmental claims.
of reinsurance that would be ceded to insolvent reinsurers or to This uncertainty is due to several factors including:
commuted reinsurance contracts for both reported claims and mThe long latency period between asbestos exposure and
for IBNR. These amounts were then deducted from the disease manifestation and the resulting potential for involve-
indicated amount of reinsurance recoverable. ment of multiple policy periods for individual claims;
AIG also completed a top-down report year projection of its mThe increase in the volume of claims by currently
indicated asbestos and environmental loss reserves. These unimpaired plaintiffs;
projections consist of a series of tests performed separately for mClaims filed under the non-aggregate premises or operations
asbestos and for environmental exposures. section of general liability policies;
For asbestos, these tests project the expected losses to be mThe number of insureds seeking bankruptcy protection and
reported over the next twenty years, i.e., from 2006 through the effect of prepackaged bankruptcies;
2025, based on the actual losses reported through 2005 and the mDiverging legal interpretations; and
expected future loss emergence for these claims. Three mWith respect to environmental claims, the difficulty in
scenarios were tested, with a series of assumptions ranging from estimating the allocation of remediation cost among various
more optimistic to more conservative. In the first scenario, all parties.
carried asbestos case reserves are assumed to be within ten After carefully considering the results of the ground-up
percent of their ultimate settlement value. The second scenario analysis, which AIG now plans to update on an annual basis,
relies on an actuarial projection of report year development for as well as all of the above factors including the recent report
asbestos claims reported from 1993 to the present to estimate year experience, AIG determined its best estimate was to
case reserve adequacy as of year-end 2005. The third scenario recognize an increase of $843 million in its carried net asbestos
relies on an actuarial projection of report year claims for reserves, and an increase of $30 million in its carried net
asbestos but reflects claims reported from 1989 to the present environmental reserves at December 31, 2005. The correspond-
to estimate case reserve adequacy as of year-end 2005. Based ing increases in gross reserves were approximately $1.97 billion
on the results of the prior report years for each of the three for asbestos and $56 million for environmental.
scenarios described above, the report year approach then
AIG m Form 10-K 41