AIG 2011 Annual Report Download - page 104

impact of anti-corporate sentiment in the mind of the general public, as well as the high attachment points at
which this business is written. This change from basing the loss development factor assumptions on the last five
years provides still greater recognition of the recent calendar-year experience than the assumptions used in the
2009 loss reserve review, and in management’s judgment was warranted based on the developing trends described
above.
Approximately $80 million of the reserve strengthening in the fourth quarter of 2010 pertained to accident year
2009, whereas approximately $200 million was attributable to accident year 2008, $340 million to accident year
2007, $195 million to accident year 2006, $100 million to accident years 1999 and prior, and approximately
$95 million in the aggregate to accident years 2000 through 2005.
Excess Workers’ Compensation
Excess Workers’ Compensation Background:
This class of business has an extremely long tail and is one of the most challenging classes of business to reserve
for because it is highly sensitive to small changes in assumptions — in the rate of medical inflation or the
longevity of injured workers, for example — which can have a significant effect on the ultimate reserve estimate.
Furthermore claims estimates for this line are highly sensitive to:
• the assumed future rate of inflation and other economic conditions in the United States;
• changes in the legal, regulatory, judicial and social environment;
• the expected impact of recently enacted health care reform on workers’ compensation costs;
• underlying policy pricing, terms and conditions;
• claims settlement trends that can materially alter the mix and ultimate cost of claims;
• changes in claims reporting practices of insureds and third-party administrators;
• the cost of new and additional treatment specialties, such as ‘‘pain management’’;
• changes in injured worker longevity; and
• territorial experience differences (across states and within regions in a state).
There was no material development recognized for this class in 2011. AIG experienced significant adverse
development for this class during 2010 and 2009 of $825 million and $925 million, respectively.
Excess Workers’ Compensation Discussion and Analysis
With the passage of the Affordable Care Act in March 2010, management concluded that there is increased
vulnerability to the risk of further cost-shifting to the excess workers’ compensation class of business in particular.
Settlement efforts can also be affected by changes to evaluation protocols implemented by the Centers for
Medicare & Medicaid Services in 2009, which are expected to result in future prescription drug costs being borne
by workers’ compensation insurers to a significantly greater degree than in the past and thus likely to lead to
further deteriorating trends for the excess workers’ compensation class of business.
In addition, approximately 20 percent of the reported claims emanate from excess of loss reinsurance contracts
provided by Chartis to other third-party insurers in accident years 2002 and prior. These reinsurance contracts
generally include the so-called ‘‘follow the fortunes clause’’ whereby claims management is performed by the
ceding insurers and the outcomes of these efforts are binding on Chartis as the reinsurer. Chartis has virtually no
ability to affect the outcomes of these claims.
Moreover, underwriting actions in recent years have led to a significant increase in insured retention levels,
which reduce the frequency of moderate- severity losses but extend the time period of first report of claim,
causing further unpredictability in loss development patterns.
90 AIG 2011 Form 10-K