AIG 2011 Annual Report Download - page 106

by AIG claims staff over the past five years. This favorable development was partially offset by higher than
expected initial claim projections for accident year 2009.
For the year-end 2009 loss reserve review, AIG’s actuaries took into account the favorable development for
accident years 2007 and prior, as well as adverse development from accident year 2008. In response to the
emerging favorable development observed in the ground-up claims projections by AIG claims staff over the past
several years, AIG considered both the higher than expected initial claim projections for accident year 2008 as
well as the favorable developments for the claims projections from the earlier accident years in determining the
loss ratio for accident year 2009.
Healthcare Background and Discussion and Analysis
Healthcare business written by the U.S. and Canada region of Chartis produced moderate favorable
developments in 2011, 2010 and 2009. Healthcare loss reserves have benefited from favorable market conditions
and an improved legal environment in accident years 2002 and subsequent, following a period of adverse loss
trends and market conditions that began in the mid 1990’s.
Primary Workers’ Compensation (Commercial Risks, Commercial Specialty Workers’ Compensation and Energy)
Primary (Specialty) Workers’ Compensation Background
The Commercial Risk division writes casualty insurance accounts with revenues less than $700 million. The
majority of the business is workers’ compensation. The Energy division writes casualty insurance accounts in the
mining, oil and gas and power generation sectors. The Commercial Specialty Workers’ Compensation division
writes small monoline guaranteed cost risks. AIG’s Commercial Specialty Workers’ Compensation business unit
grew significantly in the early to mid 2000’s but has reduced its premium writings by nearly 70 percent since 2007.
A total of $518 million of adverse loss development was recorded for Commercial Specialty Workers’
Compensation in 2010. Significant improvements in claims handling, which had the effect of accelerating claims
recognition (without increasing overall loss costs), were believed to be the cause of the earlier emergence of
claims. However, the adverse loss emergence during 2010 led AIG to conclude that the worsening experience was
attributable to a credible upward trend in the emergence of losses, rather than claims handling. AIG’s conclusion
that the worsening experience necessitated a strengthening of the reserves was confirmed by an independent third-
party actuarial review during the fourth quarter of 2010. Approximately 75 percent of the year-end 2010 reserve
strengthening for this business pertained to accident years 2007 through 2009.
Similarly, Commercial Risks strengthened workers’ compensation reserves in 2010, as the adverse loss
emergence led AIG to conclude that the worsening experience was attributable to an upward trend in the
emergence of losses, rather than to claims handling. This was further confirmed by an independent third party
review.
Primary Workers’ Compensation Discussion and Analysis
The Commercial Risk, Commercial Specialty Workers’ Compensation and Energy divisions contributed
$265 million, $145 million and $115 million, respectively, of adverse development in calendar year 2011. The vast
majority of this adverse development emanates from primary workers compensation exposure and the vast
majority of the workers compensation adverse development comes from accident year 2010. In 2011, losses for
accident year 2010 continued to emerge at higher levels than anticipated by the loss ratios established at prior
year end. A key structural driver was the effect of high unemployment on the frequency of higher severity lost
time claims. The economic environment diminished the opportunities of employers to offer ‘‘light duty’’
return-to-work mitigation strategies. In addition, AIG continues to see the effect of rising medical costs from the
deployment of pain management strategies. The increase in lost time frequency and the adverse effects of medical
cost trends has resulted in higher loss ratios than anticipated at prior year end.
For each of the three sub-segments, AIG’s conclusion that the worsening experience necessitated a
strengthening of the reserves was confirmed by an independent third-party actuarial review during 2011.
92 AIG 2011 Form 10-K